Fitch Affirms South Haven, MI LTGO's and Implied ULTGO at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings takes the following rating action on South Haven, MI's (the city) limited tax general obligation (LTGO) bonds:

--$4.18 million LTGO capital improvement bonds, series 2003, affirmed at 'AA-';

--$1.23 million LTGO capital improvement bonds, series 2007, affirmed at 'AA-';

--$9.68 million LTGO capital improvement bonds, series 2008, affirmed at 'AA-';

--$9.48 million LTGO capital improvement bonds, series 2009, affirmed at 'AA-'.

Fitch also affirms an implied unlimited tax general obligation rating of 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the city's full faith and credit and its ad valorem tax, subject to constitutional, charter and statutory limitations.

SENSITIVITY/RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: Management has demonstrated a commendable record of conservative budgeting and proactive fiscal philosophy resulting in sustained very strong reserve levels.

SEASONAL ECONOMY: The seasonal nature of the population presents a moderate credit risk as the full time population is small, albeit stable.

STABLE, CONCENTRATED TAX BASE: The city tax base has enjoyed significant growth and recent stability during the economic downturn despite the high percentage of second-home ownership.

MODERATE DEBT: City debt levels are moderate in relation to the tax base. Further, overall carrying costs are moderate given the city's manageable and well-funded pension obligations.

LTGO RATING ON PAR WITH IMPLIED ULTGO: The LTGO bonds are rated on par with the implied ULTGO rating on the basis of the city's solid general fund reserves and general budgetary flexibility.

CREDIT PROFILE

The city of South Haven, 39 miles west of Kalamazoo, covers 3.5 square miles along the eastern coast of Lake Michigan. While the city's full time population is limited at just over 4,440 residents this number grows to over 15,000 during the summer with vacationers and seasonal residents.

STABLE TAX BASE

The city tax base has exhibited dramatic growth and resiliency increasing over 100% over the past decade with modest declines of 8.3% in 2011 and 1.5% in 2012. It remains vulnerable to further declines given the large number of seasonal, second-homes. Leading taxpayers are a diverse mix of retail and recreational properties but the city budget is heavily reliant on property tax revenues.

AVERAGE ECONOMIC PERFORMANCE

The city has a strong tourism base which is complemented by other local employment options in the healthcare, pharmaceutical and manufacturing sectors. Employment remains somewhat cyclical with average unemployment in Van Buren County, where 99% of the city is located, at over 12% in 2009 and 2010. The rate has improved modestly over the past two years but on average remains above state and national averages due to the seasonal economic component. City income indicators are on par with state but below national levels.

STRONG FINANCIAL RESERVES; LIMITED REVENUE FLEXIBILITY

South Haven's financial position has been consistent, characterized by healthy reserve levels and well-managed operations despite limited revenue raising flexibility. The city taxes at its maximum property tax under the Headlee limit. While the 2007, 2008, and 2009 bonds are paid from identified revenue sources, Fitch believes that if property tax revenue were needed for debt service, general fund operations could become strained given the revenue raising constraints.

General fund reserves are a strong $2.8 million or 42% of budget at fiscal year-end 2012. Operational surpluses in five of the last six years increased reserves from 28% in 2007. Budget to date preliminary results for 2013 are balanced. Fitch expects the city to maintain very high reserves to offset general fund revenue concentration and limitations.

Property tax revenue is the city's largest revenue source accounting for 70% of total general fund revenues. Uncharacteristic of many Michigan municipalities, the city has not experienced significant declines in taxable valuations and property taxes have proven to be a stable revenue source for the city. The city receives a small amount of state shared revenues and has conservatively budgeted for decreases in the statutory portion of state revenue. South Haven has been able to avoid significant staff reductions over the past three years and has made efforts to reduce spending levels in all departments slowing expenditure growth, which provides the city some future expenditure flexibility, if needed.

MODERATE DEBT

Due to the seasonal nature of the city's households, overall debt levels are high at $9,679 per capita when measured against the lower year-round population and more moderate at 4.1% of full market value, reflecting the significant investment of the seasonal residents. Repayment of debt is average with 44% of principal retired in 10 years. The city expects to issue $3 million bonds for reconstruction of the police/fire complex in 2013 and has no other plans for additional debt in the near future. While the 2007, 2008, and 2009 bonds are LTGO's of the city, the city uses tax increment revenues captured by the city's downtown development authority to pay the 2007 bonds and water utility system revenues to pay the 2008 and 2009 bonds. Fitch expects debt burden to remain moderate, with minimal additional debt issuances.

WELL-FUNDED PENSION

The city participates in the Municipal Employees Retirement System of Michigan, an agent multi-employer defined benefit pension plan. Annual pension costs are manageable at approximately 1% of general fund expenditures and the plan is 95% funded as of December 2010 using Fitch's 7% investment rate of return. Other post-employment benefits (OPEB) are being funded on a pay-go basis, $25,412 for 2012 with a moderate unfunded liability of $1.09 million at June 30, 2012. Overall carrying costs for debt service, pensions and OPEB are moderate at 19% of 2012 general and debt service fund expenditures.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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 and IHS Global Insight.

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

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Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer, +1-212-908-9167
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Analyst
or
Committee Chairperson
Arlene Bohner, +1-212-908-0554
Director
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Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com