2008-09-05 23:36:01 -

- Fitch Ratings assigns an 'A+' rating to the City of South Haven, Michigan's $10 million capital improvement bonds, series 2008 (limited tax general obligation), and affirms approximately $13.1 million in GO debt at 'A+'. The Rating Outlook is revised to Negative from Stable.

The bonds are scheduled to sell competitively on Sept. 24, 2008. The bonds represent general

obligations of the city payable from ad valorem taxes levied on all taxable property within the city subject to statutory and constitutional limitations. However, the city intends to repay debt from increased monthly fees charged to all customers of the water utility system and connection fees paid by all new customers of the system. Proceeds of the current issue will finance the construction of a new 16,000-square foot high-rate sedimentation water filtration plant in the city.

The 'A+' rating reflects a consistently sound financial position, debt levels that are high on a per capita basis but moderate compared to the tax base, and a limited economy that includes a large seasonal population and sizable automobile parts manufacturing. The Outlook revision to Negative from Stable reflects the risk associated with the undertaking of a very large debt-financed capital project which is expected to be supported in large part by growth-related revenue. Fitch believes that, while the local housing market currently appears strong, the regional and national downturn could affect the city's ability to continually generate sufficient connection fees to fund debt service on the new bonds without seeking alternate revenue. While the bonds are general obligations, Fitch believes that if property tax revenue were needed for debt service, general fund operations would be notably strained given that the city is at its property tax limit and therefore has little revenue-raising flexibility. The Negative Outlook also considers the economic weakening of the region, reflecting in part the significant auto parts presence.

South Haven is located in southwest Michigan along the shore of Lake Michigan. Approximately 99% of the city is situated in Van Buren County with the remaining 1% located in Allegan County. The city's 2007 permanent population is estimated at 5,116, but population increases significantly to approximately 20,000 during the summer as second-homeowners, renters, and tourists take advantage of boating and recreational activities along Lake Michigan. Local employment options include the pharmaceutical and auto parts industries, as well as a burgeoning health care sector. Unemployment, while below the state's high level, increased to a high 7.7% in June 2008 from 6.4% in June 2007.

South Haven's financial position has been consistent, characterized by healthy reserve levels and well-managed operations despite the lack of revenue-raising flexibility. The city's unreserved general fund balance equaled $1.6 million or 28.8% of spending in fiscal 2007, compared to $919,000 (20%) in fiscal 2002. The city's 10 largest tax payers account for 15.1% of assessed valuation, although the city's largest taxpayer, Nobel Industries (which accounts for 4.3% of the tax base) has announced plans to shut down one of two plants in the city.

Due to the seasonal nature of the city's households, debt levels are high when measured against the year-round population. However, reflecting the significant investment of the seasonal residents, debt levels are moderate as a percentage of market value of the property tax base. Direct debt equals $4,196 per capita and 2% of full market value. Overall debt, including local school district obligations, is $7,444 per capita, and 3.5% of full market value.

Repayment of debt is slightly below average with about 45.4% of principal retired in 10 years. The city plans to issue additional debt of $7 million-$8 million in the next year to complete construction of the water filtration plant.

Fitch issued an exposure draft on July 31 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, Chicago
A. Paul Sadlowski, 312-368-3198
Melanie A.J. Shaker, 312-368-3143
or
Media Relations:
Cindy Stoller, 212-908-0526, New York