Fitch Affirms Ottawa County, Michigan's GOs at 'AAA'; Outlook Stable

Fitch Ratings has affirmed the following Ottawa County, Michigan (the county) limited tax general obligation (LTGO) ratings at 'AAA':

--$40.5 million outstanding LTGO bonds;

--$9.8 million outstanding Ottawa County Building Authority building authority and building authority refunding bonds, series 2005.

In addition, Fitch affirms the implied general obligation, unlimited tax rating on the county at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are secured by the county's full faith and credit general obligation and ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.

Building authority limited tax general obligation bonds are secured by cash rental payments under a lease between the building authority and the county. The obligation to make the cash rental payment carries the county's full faith and credit general obligation and ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations. The obligation to make the cash rental payments is not subject to set-off or abatement for any cause nor is it subject to annual appropriation.

KEY RATING DRIVERS

STRONG FINANCES: Conservative budgeting and judicious use of reserve funds has enabled the county to weather the economic contraction without materially diminishing its substantial financial flexibility.

AVERAGE SOCIOECONOMIC PROFILE: Income levels approximate those of the state and nation. The county's tax base is showing signs of stabilization and Fitch views growth expectations as realistic based on current activity.

MODERATE DEBT LEVELS: County-related debt levels are moderate and debt service costs are a modest portion of the budget. Other long-term liabilities, including pension and other post-employment benefit (OPEB) costs, make a more substantial claim on resources, but should remain manageable.

LTGO RATING ON PAR WITH IMPLIED ULTGO: The equivalent 'AAA' ratings reflect the substantial financial flexibility enjoyed by the county, as evidenced by its substantial reserve levels and moderate amount of taxing margin.

LEASE OBLIGATION ON PAR WITH LTGO: The 'AAA' rating on the building authority bonds reflects the county's general obligation, limited tax pledge to make rental payments, which is not subject to appropriation or abatement.

RATING SENSITIVITIES

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

The county is located in the southwestern section of Michigan's lower peninsula on the coast of Lake Michigan on its western border. Encompassing 565 square miles, the county is approximately 174 miles west of Detroit and 150 northeast of Chicago. The Census 2010 population of 263,801 represents compounded annual growth of 1% from the previous Census.

ABOVE AVERAGE SOCIOECONOMIC PROFILE

County residents' wealth indicators are somewhat mixed, with per capita income at 99% of the state and 90% of the nation, and median household income registering a more positive 114% of the state and 106% of the nation. The poverty rate is relatively low, about one-third less than the state and national averages.

ECONOMY SHOWING SIGNS OF RECOVERY

The local economy is highly dependent upon manufacturing, which contracted significantly during the recession and is now expanding with the increase in demand for durable goods. Unemployment rates, which ranged from 11%-12% during the height of the downturn, have normalized and are now below the state and national rates. The October 2013 rate of 6.4% is above the 5.7% recorded a year prior, with growth in labor force outpacing that of employment, but compares favorably to the state (8.3%) and nation (7.2%). On average for 2013, growth in employment slightly outpaced that of the labor force, the fourth consecutive year of growth for both indicators.

Taxable value declined 7% from its peak in 2009 through 2012, though declines moderated annually during that period. While the county budget assumed assessed valuation would remain flat in 2013, there was a 1.5% increase largely driven by single family residential properties. The county is budgeting 3% growth in 2014, which Fitch believes is realistic given increases in building permit and development activity.

HISTORY OF STRONG FINANCIAL PERFORMANCE

The county's financial operations are characterized by balanced operations and maintenance of solid general fund balances, supplemented by ample reserves outside of the general fund. Adding to the county's financial flexibility is the 0.665 mill margin beneath the maximum allowable operating millage, which could generate an additional $6.28 million annually, or 13.2% of fiscal 2012 spending, based on 2013 taxable valuation. The county has no plans to utilize the margin, but its existence remains an important pillar of revenue flexibility.

The county has had operating surpluses in each of the past three fiscal years. The unrestricted ending general fund balance in fiscal 2012 reached $33.3 million or a strong 59% of operating expenditures and transfers out, solidly in excess of the 10%-15% policy minimum. Revenues are highly dependent upon property taxes, though declines in assessed valuation have resulted in a reduction in importance to general fund revenues from 71% in fiscal 2010 to 64% in fiscal 2012. The county has relied upon tightened expenditure controls to ensure budgetary balance, having reduced expenditures in each of the past three fiscal years, albeit modestly.

The county also has access to a number of reserves outside of the general fund which help to smooth the impact of unexpected costs to the general fund. There is currently about $29.1 million or 61.3% of fiscal 2012 general fund spending, available in reserves outside of the general fund, which are largely composed of the delinquent tax revolving fund. Access to these funds offers the county financial flexibility in lieu of property tax raises.

CONSERVATIVE BUDGETING DRIVES STRONG FINANCIALS

The county budgeted to end fiscal 2013 with an operating deficit of $1 million, though preliminary results indicate a $1 million surplus. Preliminary results of fiscal 2013 show property taxes increasing 1.4%, versus the budgeted expectation of 0% growth. The county managed expenses by reducing or delaying expenditures in various areas, with departments typically spending about 97% of budget.

The fiscal 2014 budget assumes the millage rate will remain constant, but taxable value will increase 3%, driving an increase in property taxes. The county is budgeting a small draw on ending fund balance, but expects departments to continue their historical trend of under-spending budgeted amounts.

MODERATE DEBT LEVELS

The debt burden is moderate at 4.6% of market value or $3,538 per capita. Existing debt is scheduled to amortize rapidly, with 78% repaid within 10 years. No future borrowing for county purposes is expected within the next 10 years, although the county expects to continue its practice of issuing debt for local entities.

The county has taken substantive steps to manage its long-term liabilities, including transitioning from a defined benefit to defined contribution pension benefit model. All new employees are on the defined contribution plan and the county expects this change to save $38 million over the next 30 years.

The county participates in the Michigan Municipal Employee Retirement System (MERS), which is funded at 81.4%, and adequately funded on a Fitch-adjusted estimate of 73.36% using a more conservative 7% discount rate. In addition to fully funding its pension actuarial required contribution (ARC), the county has prudently begun funding of its OPEB liability. Carrying costs are low, with debt service, pension ARC, and OPEB expenses, including amortization of the accrued liability, representing a modest 6.3% 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=814534

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