Fitch Affirms St. Ignace, Michigan's GOs at 'A-'; Outlook to Negative

2008-06-23 23:58:09 -

- In the course of routine surveillance, Fitch Ratings affirms the 'A-' rating on St. Ignace, Michigan's approximately $615,000 in outstanding general obligation (GO) bonds. The Rating Outlook is revised to Negative from Stable.

The rating reflects the city's seasonal economic base and moderate-to-low debt burden. Fitch's primary credit concern is the limited financial flexibility due to weak financial performance and low reserve levels. The Negative Outlook reflects Fitch's belief that recent fiscal performance indicates the likelihood of continued budgetary pressures and further declines in general fund reserve levels, which could trigger a downgrade.

Financial operations are weak with three consecutive years of deficits between fiscal 2005 and 2007 in the general fund, leading to a low total general fund balance of $146,000, or 6.5% of spending, at the end of fiscal 2007. Unreserved fund balance was just over $113,000, or 5.1% of spending, that year. At the end of fiscal 2003, unreserved fund balance was more than double that amount at approximately $239,000, or 12.7% of spending. The city adopted a balanced budget for fiscal 2009 that does not anticipate any further use of general fund reserves. Rising expenses, especially fuel costs, are leading city management to more closely examine spending priorities and may lead to delays in equipment purchases and other budgeted outlays.

St. Ignace also manages three major enterprise systems (a water fund, a sewer fund, and a marina fund) that have exerted pressures on the city's overall finances in the past several years. The sewer and marina funds ended fiscal 2007 with negative cash balances of $8,493 and $54,111 respectively. Both the water and sewer funds have outstanding revenue bonds (unrated) and in fiscal 2004, the city violated bond covenant requirements to maintain debt service reserve levels. A five-year plan, including rate increases was implemented and reserve levels subsequently improved. The water system now meets its bond covenant requirement, with the sewer fund expected to reach its requirement by 2010. While plans appear to be in place to resolve fiscal issues with the enterprise funds, any further declines could significantly weaken the already vulnerable general fund.

Due to limited capital needs, the city's debt position remains affordable with net direct debt equaling 1.13% of the market value of property and $1,036 on a per capita basis. Overlapping debt includes the St. Ignace School District and the County, and is also moderate at 2.89% of market value and $2,661 per capita. The city's largest capital project is a $5.3 million sewer collection system to replace the current one. The project will be financed largely through federal or state loans. The city expects to fund additional discretionary capital projects, including park improvements, through grants.

St. Ignace is located in Mackinac County, at the eastern end of Michigan's Upper Peninsula. Year-round population was estimated at 2,360 in 2006. The city, five miles north of Mackinaw City, benefits from its proximity to interstate highway 75, connecting the Upper Peninsula to the rest of the state across the Mackinac Bridge, and Mackinac Island, a summer resort area. Tourism is the city's main economic driver, with hotels, resorts and ferry companies servicing Mackinac Island dominating the list of top taxpayers and accounting for a large portion of the employment base. The Mackinac Bridge Authority reports declines in the number of crossings for the last several years, which Fitch believes indicates a slowdown in regional tourism, reflective of the state's weak economic climate. The number of crossings was down 1.9% in 2007 versus the prior year, and data through May 2008 indicates a further 6.6% decline year to date.

Local and county government, Mackinac Straits Hospital and First National Bank are also major employers. Mackinac Straits recently began construction of a new hospital with construction estimated to be completed within two years.

St. Ignace's taxable assessed value (TAV) grew an average 4.1% annually between fiscal 2003 and 2007. While the city reports growth of 3%-5% for fiscal 2008, in future years the expectation is for slower growth, or declines in TAV. Property tax delinquencies in the current fiscal year are up $48,000 versus the prior year, and collection rates are relatively low with just 87.63% of fiscal 2007 levies collected within the year. However, Mackinac County, like several counties in the state, guarantees its localities 100% of property tax levies through the annual sale of delinquent tax notes by the county treasurer.

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Fitch Ratings
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