Fitch Affirms Romulus, MI's LTGOs at 'BBB+'; Outlook Stable

Fitch Ratings affirms the ratings for Romulus, Michigan's (the city) obligations as follows:

--$5.175 million limited tax general obligation (LTGO) capital improvement bonds, series 2006 at 'BBB+';

--$13.685 million LTGO recreation center bonds, series 2006 issued by Romulus Tax Increment Finance Authority (TIFA) at 'BBB+';

--Implied unlimited tax general obligations (ULTGOs) at 'A-'.

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are secured by the full faith and credit pledge of the city, subject to applicable constitutional, statutory and charter limitations. The TIFA bonds are additionally secured by the tax increment revenues collected within the development area.

KEY RATING DRIVERS

IMPROVING FINANCIAL OPERATIONS: After two years of fund balance declines, the city had surpluses in fiscal 2012 and 2013 and expects nominal deficits in fiscal 2014 and 2015.

DECLINING ASSESSED VALUE: Repeated sizable declines in assessed value (AV) since fiscal 2009 have resulted in reduced property tax payments, though declines have slowed.

LIMITED FINANCIAL FLEXIBILITY: Romulus is at its legal taxing limit and proposals to increase millage were rejected by voters, limiting spending flexibility.

ACTIVE EXPENSE MANAGEMENT: Positions have been eliminated, union and non-union employees have absorbed cuts in pay and benefits, and services have been reduced to manage city expenditures.

WEAK PENSION FUNDING LEVEL: The city's primary pension plan is poorly funded and expenses for pensions, debt and other post-employment benefits (OPEB) make up a high portion of the budget.

RATING SENSITIVITIES

ADDITIONAL DECLINES: Declines in revenue combined with a failure to cut costs could reduce financial flexibility and result in downward rating pressure.

TAXBASE CHANGES: Further large declines in taxable values would challenge the budget given the property tax cap, pressuring the rating. Increases in taxable values, though unlikely, would increase budgetary flexibility and could move the rating upward.

GENERAL MOTORS REDUCTIONS: Any withdrawal of operations by General Motors (GM) would impair the city's financial flexibility.

CREDIT PROFILE

Romulus is a mature suburb of Detroit, located in the southwestern portion of Wayne County, and home to the Detroit Metropolitan Wayne County Airport (the airport).

SUBURB ANCHORED BY GM AND AIRPORT; ASSESSED VALUES DECLINING

Wealth indicators in the city are below average, with per capita money income just 80% of the state and 73% of the national averages. Romulus's unemployment rate of 6.5% in December 2013 is well below past highs and the rates for the surrounding county and state. However, the improvement is driven largely by a decline in the city's labor force, which is down over 10% since 2004.

The city's taxable valuation (TV) fell by 8.2% in 2010, 10% in 2011, 12.8% in 2012 and 2.4% in 2013. In addition tax collection rates have been consistently low. GM has a large engine plant in Romulus and is its top taxpayer. GM has recently made large investments in the Romulus plant, which provides Fitch some comfort regarding GM's continued commitment to this location. The presence of the airport makes the city a desirable place for businesses to locate, and the city has several fairly large corporate developments in progress. Additionally, several new homes have been sold and are under construction in a new real estate development, so Fitch believes that TV should continue to stabilize.

MANAGEMENT UNREST

The city has had several incidences of recent management turmoil. In late 2011 the city's former police chief and five police officers were fired after charges of misuse of drug forfeiture funds. More recently, in March, 2013, the former mayor's home was raided by the state police as part of a public corruption investigation. A new mayor was elected in late 2013. Fitch does not believe the turmoil has had a material impact on the city's financial operations, though Fitch will continue to monitor the situation.

MODERATE STABILITY AFTER RAPID DECLINE IN FINANCIAL FLEXIBILITY

After several years of general fund operating surpluses, the city's financial cushion was materially weakened in fiscal 2010 by a $2.1 million operating deficit from revenue shortfalls that reduced its unreserved fund balance by about one-half. The city ended the year with an unreserved fund balance of $2 million or 9.7% of expenditures. After voters twice rejected a millage increase in fiscal 2011 the city made steep cuts in services in response, including 36 layoffs (reducing the city to 145 full time employees). As a result, the city finished fiscal 2011 with a smaller $516,000 deficit (2.9% of expenditures), reducing unrestricted fund balance to a modest $1.4 million (7.6% of spending).

The city finished fiscal 2012 with a $625,000 surplus (3.85% of spending). This restored the city's unrestricted fund balance to $2 million or 12.4% of spending. The improved performance in fiscal 2012 was a result of a reduction in police positions in the special investigation unit and growth in traffic enforcement revenue that more than offset increased staffing in this area. Other savings in fiscal 2012 were achieved through labor contracts with health care reductions and 5% temporary pay cuts.

Fiscal 2013 finished with an $840,000 surplus, further increasing the city's unrestricted fund balance to $3 million or 17.1% of spending. The city has benefitted from notable growth in fines and forfeits revenue, more favorable labor contracts, filling positions with non-benefitted employees, delayed capital improvements, and stable state funding. The city also transferred $350,000 from the general fund to support the Romulus Athletic Center, and is transferring a similar amount in fiscal 2014.

Fiscal 2014 is projected to finish with a small deficit, significantly better than the $941,000 budgeted deficit. The improved performance was driven by savings from unfilled positions, further delayed capital improvements, an increase in licenses and permits, and growth in state funding. The preliminary fiscal 2015 budget features a $115,000 deficit. After a one year gap, the city will be renewing a federal grant that will finance additional firefighters. The city expects an increase in revenue from an additional court fee. The budget assumes property tax revenue will continue to decline with further reductions in TV.

MODERATE BUT GROWING DEBT PROFILE

The city's debt profile is moderate, with above average overall debt levels, low direct debt, and rapid amortization. The city recently completed a $6 million bond issue and plans a $17.5 million issuance in early 2015 to finance a long-delayed facility for police, fire and courts, as well as improvements to city hall. The two bond issues raise the city's debt level to a high but still manageable level. The TIFA bonds are self-supporting. The city has only been doing minimal capital spending so has a number of deferred needs, only some of which are financed by the recent and planned bond issues.

VERY WEAK PENSION FUNDING LEVEL

Romulus is a member of Michigan Municipal Employees' Retirement System (MERS) for police and fire. Those not in MERS participate in a defined contribution plan. Romulus consistently makes all required pension contributions. MERS is poorly funded at 45%, or approximately 41% using Fitch's estimated 7% discount rate assumption. OPEB costs are high, but should moderate somewhat with new labor contracts. Total payments for pensions, the defined contribution plan, OPEB and debt service are 20% of government fund expenditures with increased debt service and pension costs.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827234

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