OREANDA-NEWS. Fitch Ratings takes the following rating action on South Haven, MI's (the city) limited tax general obligation (LTGO) bonds:

--\$1.1 million LTGO capital improvement bonds, series 2007, affirmed at 'AA-';
--\$9.26 million LTGO capital improvement bonds, series 2008, affirmed at 'AA-';
--\$8.995 million LTGO capital improvement bonds, series 2009, affirmed at 'AA-'.

Fitch also affirms the implied unlimited tax general obligation (ULTGO) rating at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from by the city's full faith and credit and its ad valorem tax, subject to constitutional, charter and statutory limitations.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: Management has demonstrated a commendable record of conservative budgeting and proactive fiscal philosophy resulting in sustained very strong reserve levels.

SEASONAL ECONOMY: The seasonal nature of the population presents a moderate credit risk as the full time population is small, albeit stable.

STABLE, CONCENTRATED TAX BASE: The city tax base has enjoyed significant growth with modest fall-off during the recent economic downturn despite the high percentage of second home ownership.

MODERATE DEBT: City debt levels are moderate in relation to the tax base. Further, overall carrying costs are moderate given the city's manageable and well-funded pension obligations.

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 and general budgetary flexibility.

RATING SENSITIVITIES

Fitch expects the city to maintain strong reserves to balance concerns over the seasonal, potentially cyclical tax base and revenue constraints, credit factors that Fitch believes limit the rating to its current level.

CREDIT PROFILE

The city of South Haven, 39 miles west of Kalamazoo, covers 3.5 square miles along the eastern coast of Lake Michigan. While the city's full time population is limited at just over 4,400 residents this number grows to over 15,000 during the summer with vacationers and seasonal residents.

STABLE TAXABLE BASE

The city tax base has exhibited dramatic growth and resiliency with assessed values increasing over 100% in the decade ending in 2010 followed by a modest cumulative decline of 16% through 2014. City taxable values have been very stable since 2010 due to the state valuation methodology which tempers valuation increases. While the city enjoys a sizable cushion between taxable and assessed values, it remains somewhat vulnerable to possible further valuation declines given the large number of seasonal, second homes. Recent projects and current trends in commercial and residential development support near term tax base stability. Leading taxpayers are a diverse mix of retail and recreational properties but the city budget is heavily reliant on property tax revenues.

AVERAGE ECONOMIC PERFORMANCE

The city's strong tourism base is complemented by other local employment options in the healthcare, pharmaceutical and manufacturing sectors. Employment remains somewhat cyclical with average unemployment in Van Buren County, where 99% of the city is located, at over 9% in 2012 and 2013. The rate has improved to an average of 7.9% for the period January to September in 2014 but remains above state and national averages due to the seasonal economic component. City income indicators are on par with state but below national levels with a poverty rate that is well above the national average.

STRONG FINANCIAL RESERVES; LIMITED REVENUE FLEXIBILITY

South Haven's financial position has been consistent, characterized by healthy reserve levels and well-managed operations despite limited revenue raising flexibility. The city taxes at its maximum property tax under the Headlee limit. While the 2007, 2008, and 2009 bonds are paid from identified non-general fund revenue sources, Fitch believes that if property tax revenue were needed for debt service, general fund operations could become strained given the revenue raising constraints.

Unrestricted general fund reserves remain a strong or 39% of budget at fiscal year-end 2014 but small on an absolute basis at \$2.5 million. Planned drawdowns totaled an aggregate \$691,000 in 2012 and 2013 followed by a surplus of \$182,000 in 2014. Projections for fiscal 2015, based on year-to-date results are for a \$331,000 drawdown related to one-time expenditures. Fitch expects the city to maintain very high reserves to offset general fund revenue concentration and limitations.

Property tax revenue is the city's largest revenue source accounting for 60% of total general fund revenues. Property taxes have proven to be a stable revenue source for the city. The city receives a small amount of state shared revenues and has conservatively budgeted for flat to modest increases in the statutory portion of state revenue. South Haven has been able to avoid significant staff reductions by reducing spending levels in all departments slowing expenditure growth. Moderate future expenditure flexibility remains.

MODERATE DEBT

Due to the seasonal nature of the city's households, overall debt levels are above average at \$5,172 per capita when measured against the lower year-round population and more moderate at 2.31% of full market value, reflecting the significant investment of the seasonal residents. These ratios are net of approximately \$18.5 million LTGO bonds which are supported by water charges.

Repayment of tax-backed debt is average with 50% of principal retired in 10 years. The city issued \$3 million bonds for reconstruction of the police/fire complex in 2013 and has no other plans for additional debt in the near future. While the 2007, 2008, and 2009 bonds are LTGOs, the city uses tax increment revenues captured by the city's downtown development authority to pay the 2007 bonds and water utility system revenues to pay the 2008 and 2009 bonds. Fitch expects the debt burden to remain moderate, with minimal additional debt issuances.

WELL-FUNDED PENSION

The city participates in the Municipal Employees Retirement System of Michigan, an agent multi-employer defined benefit pension plan. Annual pension costs are low at approximately 2.3% of total governmental expenditures and the plan is approximately 88% funded as of December 2010 using Fitch's 7% investment rate of return. Other post-employment benefits (OPEB) are being funded on a pay-go basis, \$57,707 for 2014 with a moderate unfunded liability of \$827,015 at June 30, 2014. Overall carrying costs for debt service, pensions and OPEB are moderate at 12.4% of 2014 total governmental expenditures.