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Fitch Affirms Battle Creek, MI Bonds at 'AA', Outlook Stable



  Fitch Affirms Battle Creek, MI Bonds at 'AA', Outlook Stable

Business Wire

NEW YORK -- December 18, 2012

Fitch Ratings has affirmed the following Battle Creek, MI bonds:

--Implied ULTGO rating at 'AA';

--$12.7 million LTGO refunding bonds, series 2011 at `AA';

--$46.8 million LTGO downtown development bonds, series 2008 at `AA';

--$7 million LTGO tax increment finance authority bonds, series 2009 and 2010
at 'AA';

--$6.2 million LTGO building authority bonds, series 2008 at 'AA'.

The Rating Outlook is Stable.

SECURITY

All LTGO bonds are ultimately secured by the city's pledge of its full faith
and credit and its ad valorem tax, subject to charter, statutory and
constitutional limitations. The downtown development bonds, tax increment
finance authority bonds, and building authority bonds are secured in the first
instance by a pledge of tax increment revenue.

KEY RATING DRIVERS

REDUCED BUT SOUND RESERVES: Despite generating general fund operating deficits
for four of the past five years, the city's financial cushion remains sound.
Management appears knowledgeable and realistic regarding future budget issues
and employs extensive financial and capital planning tools. Fitch expects
management to continue containing expenditures and maintain acceptable
financial margins, given a stabilizing economy and tax base.

ABOVE AVERAGE TAX BASE CONCENTRATION: The city's top three taxpayers are a
high 14% of the total taxable assessed value led by Kellogg Company, Denso
Manufacturing and Kraft Foods Inc.

AVERAGE ECONOMY: Recently improved unemployment rates are largely due to labor
force losses not new job creation. City income levels remain well below state
and national levels. Fitch expects stabilization of the manufacturing
employment base and/or diversification into other employment sectors over the
long term given the city's strong local infrastructure.

MODERATE DEBT LEVELS: Overall city debt is average at $3,680 per capita and
5.4% of market value. City debt includes a sizable amount of LTGO bonds which
are expected to continue to be paid from tax increment revenue. Total city
debt principal amortization is rapid with 79% retired in 10 years. Future
capital needs appear modest.

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, existence of some taxing capacity under statutory limits, and the
high correlation between the city-wide and various tax increment district tax
bases.

CREDIT PROFILE:

Battle Creek is located in south central Michigan roughly 42 miles southwest
of Lansing and is best known as the historic capital of breakfast food
production. City population has been stable around 53,000 over the past three
decades.

MANUFACTURING BASED ECONOMY REMAINS STABLE

Kellogg Company has a large presence within the community, serving as both the
city's largest taxpayer at 8% of total taxable valuation (TV) and the largest
employer with 2,500 employees. Kellogg (Fitch senior unsecured rating 'BBB+;
Negative outlook) has continued to make significant investments within the
city, including a $54 million expansion of its research and development center
in 2009 and recently added a few hundred new employees following an
acquisition.

While the regional economy has experienced some diversification in recent
years, employment within the manufacturing sector as a percentage of total
employment is still double the national average and somewhat cyclical.

The city's unemployment rate increased to over 10% for the years 2009-2011 but
recently has improved and declined to 7.1% in October 2012 which is below
state and national levels. Much of the improvement appears to be due to labor
force losses and modest employment additions.

City wealth levels are below average with per capita income levels at 84% of
the state mean and individual poverty rates at 141% of the state norm.

CONCENTRATED TAX BASE, VALUE DECLINES SLOWING

Battle Creek has experienced recent TV declines of 7% the past two years which
are not as precipitous as many eastern Michigan communities. A stable trend is
expected over the next few years as several new small development projects are
completed.

The city tax base is comprised of 46% residential property, 20% commercial and
32% industrial, and, outside the top 3 taxpayers, is fairly diverse with the
top 10 payers accounting for 19% of total TV.

The city's tax increment districts (tax increment finance authority (TIFA) and
downtown development authority (DDA)) are highly concentrated by leading
taxpayers and have had valuation fluctuations over the past five years.
Historically the districts have generated sufficient annual property tax
increment and state business tax reimbursement revenues to support their
annual debt service payments without additional city funding. Increment
district debt service coverage remains sound in 2011 at 1.25x for DDA, over
3.00x for TIFA.

City direct tax rates have been stable over the past five years and the
operating levy remains below the state constitutional limit which provides
approximately $663 thousand of additional revenue raising flexibility based on
the city's current tax roll.

ADEQUATE RESERVES, BUT RECENT DEFICITS OF SOME CONCERN

The city generated small general fund operating deficits (after transfers) in
four of the past five fiscal years as it utilized available excess reserves to
temper service cuts. Budget gaps were also addressed with negotiated salary
and benefit concessions and hiring freezes. Despite the deficits, the city's
financial reserve levels are sound with a fiscal 2011 unrestricted general
fund balance of $6.9 million or 15% of spending.

In fiscal 2011, the general fund reserves increased due to an accounting
change. General fund reserves now include previously separate permanent fund
(special projects reserves) and budget stabilization (special revenue fund)
balances of about $1.4 million.

Unaudited fiscal 2012 general fund financial performance is balanced with the
exception of an expected positive $588,927 prior year income tax revenue
adjustment which, combined with positive operational performance, will
increase reserves to over $7 million. Management policy is to maintain general
fund reserves between 10-15%.

The budget proposal for fiscal 2013 is balanced primarily through conservative
revenue projections, maintenance of current staffing levels, continued cost
efficiencies, and stable total millage rate. Management's continuing ability
to mirror expenditures with recurring revenues is a key credit consideration.

MODERATE, RAPIDLY AMORTIZING DEBT

Total city debt levels are moderate at $3,680 per capita or 5.4% of market
value. Over 50% of the total debt outstanding is from local school districts
and over 80% percent of the city direct debt is paid from a combination of
utility fees, tax increment and state gas tax revenues collected outside of
the general fund. A material change in the collection of these revenues,
though not anticipated, would likely strain the city's financial operations
and could pressure the rating.

Total city debt principal amortization is rapid with 79% repaid within 10
years with minimal expected future debt as the city funds a significant amount
of capital improvements from its annual budget. All city debt is fixed rate.

Overall carrying costs, including the self-supported tax-increment debt
service and including pension and other post-employment benefits (OPEB) costs,
are high at 27% of adjusted expenditures.

The city provides employment benefits to its public safety staff through a
single-employer defined benefit pension plan, and through a state-sponsored
pension plan for all other unionized employees. The combined pension unfunded
actuarial accrued liability (UAAL) totaled $58.5 million as of December 2010
or 1.7% of 2011 market value. The Fitch-adjusted funded ratio for the state
plan was strong at over 100% and an adequate 74% for the city police and fire
plan.

As of June 2009, the OPEB UAAL totaled $52.5 million or 1.5% of 2011 market
value. The city regularly funds pension costs at 100% and OPEB at
approximately 50% of annual actuarial requirement. The city has negotiated
some benefit concessions and eliminated benefits for new hires, but these are
expected to have minimal near term benefit.

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, S&P/Case-Shiller Home Price
Index 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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PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE '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.

Contact:

Fitch Ratings
Primary Analyst
Bernhard Fischer, +1-212-908-9167
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Analyst
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
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