OREANDA-NEWS. February 24, 2016.  Fitch Ratings upgrades the following ratings on Taylor, Michigan's (the city) general obligation bonds:

--\\$2.5 million limited tax general obligations (LTGOs) series 2004 and 2005 to 'BB+' from 'BB';
--\\$505,000 LTGO downtown development (DDA) bonds series 2002 to 'BB+' from 'BB';
--\\$4.5 million Brownfield Redevelopment Authority (BRDA) bonds, series 2005B and 2006 to 'BB+' from 'BB';
--Implied unlimited tax general obligation (ULTGO) rating to 'BBB-' from 'BB+'.

The Rating Outlook is Stable.

SECURITY
The LTGO bonds are backed by the city's full faith and credit general obligation and its ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.

The Downtown Development Authority (DDA) TIFA and Brownfield Development Authority (BRDA) bonds are payable from relevant tax increment revenues collected within the development area. The city also pledged its full faith and credit subject to applicable constitutional, statutory and charter limitations.

KEY RATING DRIVERS

SIGNIFICANT IMPROVEMENT IN FINANCIAL PERFORMANCE: The city's finances have stabilized since the implementation of a deficit elimination plan which drastically reduced expenditures and generated sizable surpluses in fiscal 2013 through 2015. The city projects a general fund surplus in fiscal 2016 based on current year results, indicating a return to structurally balanced operations.

STABILIZING TAXABLE VALUE: There were modest increases in taxable value (TV) in 2015 and 2016, reflecting improvements in the local economy after five years of significant declines through 2014. Limited additional growth in the base is expected in the near term.

MINIMAL REVENUE-RAISING FLEXIBILITY: Property taxes are the city's main revenue source and the city is currently at its property tax cap; revenue-raising options are limited.

CONTINGENT OBLIGATIONS: The general fund is obligated to support contingent obligations whose intended repayment source has not materialized. While general fund support of these obligations is expected to be needed over the life of the obligations, the subsidy is expected to remain manageable.

LIMITED FINANCIAL FLEXIBILITY: The one-notch difference between the LTGO and the implied ULTGO rating reflects the city's inability to increase property taxes.

DEVELOPMENT BONDS CARRY LTGO PLEDGE: The DDA and BRDA bonds carry a pledge of both tax increment revenues and the city's LTGO. The ratings are based upon the LTGO rather than the pledged revenues due to revenue shortfalls and weak legal protections, including the lack of an additional bonds test.

RATING SENSITIVITIES
ABILITY TO MAINTAIN BUDGETARY BALANCE: The rating and Outlook are highly sensitive to management's ability to maintain balanced general fund operations and improved general fund liquidity without inter-fund borrowing.

CREDIT PROFILE
Taylor is located in Wayne County, MI, approximately 18 miles southwest of Detroit. The city has experienced a 6.2% population loss since 2000, with 61,817 residents in 2014.

IMPROVED GENERAL FUND OPERATIONS
The city had general fund surpluses in fiscal 2013 through 2015 thanks to a deficit reduction plan which eliminated deficits through expenditure reductions, including personnel cuts and salary and benefit concessions. Prior to fiscal 2013, the city had rapid declines in property tax and state revenues driven by the economic recession. As a result, the city had several years of deficits which depleted general fund reserves. Unassigned general fund balance reached its lowest point in fiscal 2012 with a negative year-end balance of \\$5.4 million or -11.6% of government spending; this weak position severely limited the city's financial flexibility.

To meet liquidity needs, the city utilized short-term loans from its water and sewer enterprises which are repaid from property taxes no later than Oct. 31 in each fiscal year; in fiscal 2014 and 2015, the city borrowed \\$7.5 million. The water and sewer enterprise funds have remained healthy, with an \\$18.7 million cash balance equivalent to over 500 days cash on hand in fiscal 2015. As evidence of the progress in spending reductions, the city reduced the enterprise fund loan amount to \\$3 million in fiscal 2016, less than half of prior year total. Fitch views the reduced reliance on short-term borrowing as credit positive.

Fiscal 2015 ended with a \\$3 million general fund surplus that increased unassigned general fund balance to \\$4.1 million from \\$389,000 in fiscal 2014. The surplus increased unassigned general fund reserves to a satisfactory 12% of spending. The majority of the surplus was driven by a \\$2.4 million increase in federal grants for public safety and a \\$685,000 increase in other revenues including fines and forfeitures. Taylor still faces financial pressure because it is at its maximum property tax rate and has limited ability to raise additional revenues. The adopted fiscal 2016 budget assumed a small property tax revenue increase due to modest growth in taxable property values, and tax collections are reportedly performing better than budget. However, due to the limited ability to increase local revenues management must rely on federal grants and recurring expenditure cuts and labor contract savings to balance general fund operations.

Based on year-to-date results including the restoration of \\$2.4 million in federal public safety grants and one-time revenues from the sale of a city-owned property and court fees, the city expects to end fiscal 2016 with a surplus. While the spending reductions made to date have better aligned revenues and expenditures, Fitch believes the city may be pressured with demand for service restoration in the coming years.

LOCAL ECONOMIC CONDITIONS REMAIN UNFAVORABLE
Taylor is located in the 'downriver' area of metropolitan Detroit and has strong ties to the auto industry which has led to a difficult economic climate. After several years of housing market declines coupled with a significant amount of foreclosures, property tax values have recently started to stabilize. Property taxes account for just over one-half of the city's total general fund revenue. After a 30% decline in TV from 2009 to 2014, taxable values increased by 4.8% in 2015 and 2016. Based on the Wayne County auditor's projections, the city expects modestly increasing values for the next two years. Fitch believes these projections are realistic given recent economic improvement.

Current tax collection rates have been low at approximately 91% from 2010 through 2014; however, collections improved in 2014 and 2015 to approximately 92.5%. While it is the practice of Wayne County to reimburse the city for all delinquencies at the end of each fiscal year, the payment is subject to charge-backs if the county is unable to collect the delinquent taxes or sell the property. The top 10 taxpayers make up a moderately high 11.6% of total TV. Some modest development activity is anticipated, but Fitch expects the city tax base to remain sluggish over the near term.

As of October 2015, unemployment has improved to 6.3%, which was in line with the county (6.4%) but above the state (4.5%) and the national (4.8%) averages. The decline in unemployment reflects 2.6% growth in the labor force from 2012 through 2014. Taylor's wealth levels are below state and national averages. Median household income was 82.6% and 80% of state and national medians, respectively, in 2014.

REDUCTION IN CONTINGENT OBLIGATIONS
The city has pledged its full faith and credit to bonds issued by BRDA for the Midtown (Island Lakes) development project. Due to the economic downturn and insufficient projected tax increment revenues, the projects funded with proceeds from the series 2005 and 2006 BRDA bonds were never completed. The city recognized the entire liability, currently \\$7.2 million of outstanding debt.

The city recently authorized a third party legal review which concluded that 23.68% of the bond proceeds for development were used for new water and sewer infrastructure. As a result, the proportionate share of the liability related to the brownfield redevelopment project was transferred to the city's water and sewer funds. The water and sewer funds each recognize \\$1.62 million of the liability, while the remaining \\$3.9 million is recognized as a governmental activities liability.

The city has provided general fund subsidies since fiscal 2012 to fund debt service shortfalls and made a \\$372,000 payment to the BRDA bonds in fiscal 2015. Total potential general fund subsidy for all BRDA issues appears manageable, as subsidies represent less than 2% of fiscal 2015 general fund expenditures. The general fund subsidy is expected to decrease in fiscal 2016 through bond maturity or until project completion as a result of the contribution from the water and sewer funds to pay debt service.

LARGE LONG-TERM LIABILITIES
Overall debt is manageable at \\$1,777 per capita and 4.2% of market value. The city has no plans to issue additional debt, and amortization is above average with 85% of total principal retired within 10 years. Overall carrying costs for direct city and contingent debt service plus pension and other post-employment benefits (OPEB) funding are high at 34.9% of fiscal (year) total governmental expenditures.

The city administers two defined benefit pension plans covering nearly all police, fire, and general government employees; court employees are covered by the state-run Municipal Employee Retirement System (MERS). Using a more conservative 7% adjusted rate of return%, MERS was adequately funded at 74.5% as of Dec. 31, 2014. The city-administered plans were funded at 53.2% and 57.1%, respectively, which could lead to even higher carrying costs in future budgets. OPEBs are funded on a pay-go basis; the unfunded actuarial accrued liability is high at \\$333.1 million, equal to 12.5% of the tax base market value.