Citywide News

Posted on: December 19, 2016

S&P improves City's scores for third straight year

For the entire analysis, click here

For the third straight year, the long-term rating on the City of Taylor’s limited-tax obligation debt has improved, this time from “A-” to “A” with an outlook of “stable.”

Standard & Poor’s Global Ratings announced the newest ratings November 4. Ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills and notes. Most governments and companies are issued a rating based on their financial strength, future prospects and past history. Companies that have manageable levels of debt, good earnings potential and debt-paying records will have good credit ratings.

S&P based in improvements on “multiple years of positive operating results that have … stabilized the available reserve position at a positive level.” Simultaneously, S&P assigned an “A” long-term rating to the City’s series 2016A and B tax increment refunding bonds, which are based on a limited-tax GO pledge.

"Budgetary performance improved dramatically in fiscal 2013, reversing a trend of structural imbalance, and has since remained consistently strong. Factors in the financial turnaround include a more stabilized management team, significant staff reductions, revisions to health care benefits and tempering declines in taxable value, which drive property taxes," wrote Standard & Poor's Global Ratings

Overall, the City’s management score was improved from “weak” to “adequate.”

An “A” rating falls within the S&P’s upper-medium investment grade bond rank. On the S&P scale, AAA is prime; AA+, AA and AA- are high grade; A+, A and A- are medium grade; and BBB+, BBB and BBB- are lower grade investment bond scores. From there, S&P rankings go to non-investment grade speculative, highly speculative, etc.  Investment grade refers to the quality of a company's credit. In order to be considered an investment grade issue, the company must be rated at “BBB” or higher by Standard and Poor's or Moody's. Anything below this 'BBB' rating is considered non-investment grade. If the company or bond is rated 'BB' or lower it is known as junk grade, in which case the probability that the company will repay its issued debt is deemed to be speculative.

The City of Taylor has worked its way upward after a budget crisis during which it faced vast revenue declines and a State of Michigan-mandated Deficit Eliminated Plan. Mayor Rick Sollars’ administration, which entered office in November 2013, along with the City Council and the City’s employees, worked their way out of the DEP nearly a year early (December 2014). The original DEP indicated that the City would eliminate the deficit by the end of fiscal year 2015-16.

At the end of fiscal year 2010-11 Taylor’s general fund had an unassigned deficit fund balance of approximately $1.9 million. That deficit dipped into the red as low at $5 million in 2011-12 before slowing crawling back and now has a modest fund balance.

According to the City’s Chief Financial Officer Jason Couture to achieve financial stability, the City should maintain an unassigned fund balance equal to 20 percent of operating expenditures, which would be approximately $6 million. Many municipalities have higher fund balances.

Mayor Sollars has emphasized that the City has remained very conscious of its difficult financial situation, and made sound financial decisions that resulted in positive gains. Taylor’s size, with a substantial budget, needs to have a very responsible unassigned fund balance, or rainy day fund.

Some of the positive issues to take from the S&P summary:

  • Despite a “very weak economy,” after several years of valuation declines, the city’s tax base stabilized in 2014 and witnessed slight increased in 2015 and 2016
  • Market value grew 2.5 and 3.6 percent in each of the past two years, to $2.73 billion
  • The improved management score reports three consecutive years of positive budgetary performance, with most positive results expected in 2016 and 2017
  • The score also reflects a return to stability in key leadership positions and positive available fund balances

S&P noted the City’s “strong” budgetary performance, with operating surpluses of 8.7 percent of expenditures in the general fund and 6.6 percent across all government funds in fiscal 2015. Those results came on the heels of 7.3 and 7.2 percent in 2014 and 2013.

According to the report, property taxes account for 30.6 percent of the general fund revenue in the City (2015). Other major sources are state-revenue-sharing (19.2), other revenue (16.1) and fines and forfeitures (13.8). Taylor strong budgetary flexibility is founded in an available fund balance of 12 percent, for $4.1M, at the end of fiscal 2015.

Cautions in the report included the following:

  • If positive budgetary performance continues and budget flexibility rises, along with some other factors, a higher rating is possible. However, that rating could hinge on progress or moderation with regard to long-term pension and health-care liabilities.
  • A lower rating could come if the City reverts to deficit spending or sees a management turnover that negatively affects budgetary performance.

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