Fitch Affirms Birmingham, MI's GOs at 'AAA'; Outlook Stable

Fitch Ratings has affirmed the following Birmingham, MI ratings at 'AAA':

--$21.3 million outstanding unlimited tax general obligation (ULTGO) bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax levied on all taxable property within the city.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: Birmingham's strong financial management is supported by conservative budgeting and consistently high financial reserves. Its operations feature additional financial flexibility including an operating tax rate that remains below the permitted level.

TAX BASE SHOWING SIGNS OF RECOVERY: After five years of declines in taxable value, fiscal 2013 and fiscal 2014 valuations show signs of recovery with small increases in each year.

ABOVE-AVERAGE ECONOMIC PROFILE: The city's above average socioeconomic profile is characterized by an affluent and well-educated population. The poverty rate is less than one-third of the state and national levels.

MODERATE DIRECT DEBT LEVELS: The city's direct debt levels are manageable and its pension system is well-funded.

RATING SENSITIVITY

The rating is sensitive to shifts in fundamental credit characteristics including the strong financial performance and a stable local economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Birmingham, Michigan is an affluent community located in Oakland County, 20 miles north of Detroit. The population was 20,025 according to the 2010 Census, representing growth of 4.2% in the previous decade.

STRONG SOCIOECONOMIC INDICATORS

The city is suburban and residential in nature and has a downtown area which is continuing to expand with the addition of new restaurants and retail establishments. The city's wealth levels are high. Per capita money income is at 265% and 242% of the state and national levels, respectively. The city's market value per capita, at $186,000 in fiscal 2012, continues at high levels. Educational attainment levels are also well above the nation's, with about 73% of city residents completing a bachelor's degree or higher, compared with about 28% for the national average. Unemployment data are not available for the city given its small size but the rate for Oakland County was 7.8% as of October 2013, below the 9.0% recorded the previous year and the state level of 10.1% for the same month, but above the October 2013 national average of 7.2%.

The city began experiencing consecutive annual declines in taxable valuation in fiscal 2008, with a 15.4% drop by fiscal 2012. The city experienced a 2.8% uptick in residential property values in fiscal 2013, and an additional 2.2% increase is expected for fiscal 2014. Fitch believes this expectation is realistic given building permit and housing start activity.

STRONG FINANCIAL PERFORMANCE AND FLEXIBILITY

Birmingham's strong financial performance results from proactive management, including multi-year budgeting and capital planning. The city maintains good financial flexibility, including sizable fund balances, modest operating taxing margin, and adjustable discretionary spending on other post-employment benefits and capital projects. In response to declines in property valuations and cuts and volatility in state aid, the city has controlled expenditures largely through attrition and reductions to headcount, to ensure budget balance.

Financial performance is generally positive, with operating surpluses in four of the past five fiscal years. In fiscal 2012, a small net operating surplus after transfers allowed the ending unrestricted general fund balance to rise to $13.3 million, 51.7% of general fund spending, from $12.9 million in fiscal 2011. The city was able to beat budgeted expectations as a result of higher than expected state revenues and building permit activity. Vacant positions which the city left unfilled helped control expenditures.

In fiscal 2013, the city had a planned draw on reserves of $1 million for a contribution to the other post-employment benefit (OPEB) trust fund. The reserve policy was amended from 10%-25% of general fund operating expenditures to 17%-40%, to be more in line with the city's typical level of reserves. The ending unrestricted was $12.3 million, or 44.5% of spending. The city was able to enhance revenues by contracting out services to other municipalities and received higher than expected state shared revenue, while expenditure reductions were achieved through a small reduction in headcount.

Year-to-date results indicate the city will end fiscal 2014 with another planned draw on general fund reserves due to a $1 million transfer to the pension system. Fitch expects that even with these planned draws, the city's reserves will remain ample and within their policy range. The increase in taxable value and increased building permit activity are helping to strengthen revenues, the effects of which are somewhat countered by a 2% wage reinstatement and additions to headcount.

AFFORDABLE LONG TERM LIABILITIES

The city's debt burden is moderate at 3.5% of market value, though presents as high on a per capita basis at $6,473. Amortization is fast with 74% of debt maturing in the next 10 years. The city is considering issuing a significant amount of debt, approximately $21.5 million, for library expansion in June 2015, but would need voter approval. The remainder of the capital projects the city has planned, which total approximately $21 million, are mostly pre-funded with existing reserves largely from the water, sewer, and parking funds.

The city's pension annual required contribution (ARC) is declining as a result of the closure of the city's pension and health care systems. The city's pension plan is well funded at 82.7% using a 7% discount rate. A five-year actuarial projection indicates annual required contributions (ARC) will decline over the period while the funded ratio reaches approximately 89% by fiscal 2018. All new employees are in a defined contribution plan. The fiscal 2012 actuarial report indicates the OPEB fund is 26.6% funded, not including additional contribution to amortize this liability made in fiscal 2013. The city also expects the OPEB ARC to decrease and the accrued liability to be approximately 45% funded by fiscal 2020. Carrying costs are in the moderate range with debt service, the pension ARC, and OPEB spending accounting for 20.8% of governmental expenditures.

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, National Association of Realtors, and Financial Advisor.

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=817535

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