Fitch assigns an 'AA' rating to the City of Kalamazoo, Michigan's (the city) following issues:
-- $3,860,000 Michigan transportation fund (MTF) bonds, series 2007;
-- $855,000 capital improvement bonds, series 2007 (limited tax general obligation [GO]).
The Rating Outlook is revised to Stable from Negative. Fitch also affirms the 'AA' rating and maintains a Stable Outlook on the city's approximately $59 million of outstanding limited tax GO debt.
Both bond series are scheduled for competitive sale on June 26, 2007 with Robert W. Baird & Co. serving as financial advisor. Both bond series constitute a limited tax GO of the City of Kalamazoo. Proceeds of the MTF bonds will finance city wide street improvements, while the GO bonds will finance a portion of the city's annual capital plan.
The revision of the Rating Outlook to Stable from Negative reflects improved financial flexibility due to stronger general fund performance and financial position, as well as the establishment of long-term reserve policies. As state revenue-sharing declined almost 18% between 2002 and 2004, the city's general fund reserves fell to a low of $2.2 million (4.4% of spending) in 2004 (Dec. 31 year-end), compared to $6.2 million (13.0%) in 2002. In response, management reduced staffing levels and instituted broad-based cuts to restore fiscal balance. In 2005 and 2006, the city experienced renewed own-source revenue growth as it contained costs, enabling general fund surpluses. Preliminary 2006 results indicate a moderate general fund surplus.
The 'AA' rating reflects the city's balanced economic foundation, moderately growing tax base, manageable debt burden, and conservative fiscal management. While Kalamazoo remains somewhat dependent on the pharmaceutical industry, the large presence of its universities and its highly educated workforce help reduce economic volatility related to manufacturing.
Kalamazoo's steady tax base growth, averaging 3.6% annually since 1999 and underpinned by management's sound financial policies and conservative budgeting, allowed the city to build adequate financial reserves. However, several years of reduced state-shared revenue, coupled with spending needs driven by public safety, sapped general fund reserves. The city reacted to these declines by constraining spending through staff reductions and limited service cuts, and fiscal 2005 audited results produced over $2 million in spending reductions relative to 2004. Coupled with renewed revenue growth, the city's fiscal 2005 general fund produced a surplus of $1.2 million, increasing the total balance to $3.4 million or 7% of spending, from 2004's $2.2 million (4.4%). Fiscal 2006 audited results are not yet available, but Fitch anticipates that the general fund may produce a moderate surplus as state revenue-sharing stabilized and property tax receipts increased significantly. Financial flexibility is further enhanced by the city's practice of contributing $2-3 million annually from the general fund for the capital program.
The city's direct debt equals $825 per capita or 1.6% of market value, with overall debt at a moderate $1,994 per capita, or 3.9%. Debt levels should remain moderate as the capital plan anticipates the use of internal sources for the bulk of its financing needs.
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