OREANDA-NEWS. Fitch Ratings has assigned the following rating to Royal Oak, Michigan:

--$17.565 million limited tax general obligation (LTGO) capital improvement refunding bonds series 2016, at 'AA'

The bonds will be sold via competitive sale on March 16, 2016, for the purpose of refunding all or a portion of the city's capital improvement bonds series 2006A, 2006B, and 2008.

Fitch Ratings has affirmed the following Royal Oak, Michigan (the city) LTGO ratings at 'AA':

--$2.45 million capital improvement bonds, series 2006A, 2007A, and 2008;
--$665,000 capital improvement refunding bonds, series 2006B.

The Rating Outlook is Stable.

SECURITY
The LTGO bonds are payable from the city's full faith and credit general obligation limited tax pledge subject to applicable constitutional, statutory and charter limitations.

KEY RATING DRIVERS

POSITIVE ECONOMIC PROFILE: The city's above-average economic profile is characterized by an affluent population and unemployment levels well below state and national averages.

AMPLE FUND BALANCE RESERVES: Management has demonstrated a record of conservative budgeting and careful expenditure control, maintaining balanced operations and ample reserves. Voter-approved millages supplement the limited base operating levy, but also introduce renewal risk.

SIZEABLE PENSION AND OPEB COSTS: Pension and other post-employment benefit (OPEB) costs consume an unusually large portion of the city's budget, constraining expenditure flexibility and raising concerns about the future direction of retiree benefit costs.

POTENTIAL INCREASE IN DEBT LEVELS: The city's overall debt levels are low with rapid amortization and near-term capital needs are manageable. However, debt levels would rise considerably if the city fully implements a plan to issue pension and/or OPEB bonds.

RATING SENSITIVITIES
STABLE FINANCIAL PERFORMANCE: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and healthy reserve levels which may offset risk of dependence on voter approved levies.

VOTER SUPPORT OF OPERATIONAL LEVIES: Continued voter support for renewal levies is key to financial stability. Failure to support renewal levies could decrease financial flexibility and put downward pressure on the rating.

RETIREE BENEFIT COSTS: While currently manageable within the city's budget framework, Fitch will monitor the direction of these costs and the city's method of funding them as they may become a pressure on the rating.

CREDIT PROFILE

The city is an affluent Detroit suburb located in southeastern Oakland County 10 miles north of downtown Detroit with a 2014 population of 59,069, which has gown modestly over the last decade.

STRONG ECONOMIC PROFILE

The city is a mature community experiencing recent redevelopment within the high-tech industry. Healthcare, manufacturing and education anchor the local economy, led by Beaumont Hospital with over 10,000 employees and various auto parts suppliers. The tax base is primarily residential (76%) with some commercial (16%) and industrial (2%) components; personal property accounts for the remainder. Overall tax base concentration is low with the top 10 taxpayers accounting for less than 6% of total taxable value (TV).

The city's TV returned to growth in 2012 after four years of recessionary declines, and is projected to grow by 5.6% in fiscal 2015. The city assessor estimates a further TV gain of 3% in fiscal 2016.

Local unemployment continues to outperform state and national averages, with the December 2015 unemployment rate of 2.6% below the rate of the prior year (3.2%), and well below the state (4.5%) and nation (4.8%). Resident wealth remains strong, with the city's per capita money income at 150% and 137% of state and national averages, respectively, and an individual poverty rate less than half of state and national levels.

CONSERVATIVE BUDGETING; AMPLE FUND BALANCES

Property taxes are the city's main revenue source, constituting 61% of fiscal 2015 revenues across the general and public safety funds, which encompass the city's general government spending. Property tax revenue increased by 7.2%, attributable to new development and steady year-over-year TV growth. State-shared revenues, the second largest revenue category, grew modestly and comprise approximately 12% of general fund and public safety fund revenues. The recent revenue gains in these two categories, accompanied by conservative expenditure controls, have resulted in consecutive annual operating surpluses that have grown unrestricted combined fund balance to $18.5 million or 44.6% of expenditures. The combined general and public safety fund balance is in excess of the city's 10-25% fund balance policy.

The fiscal 2016 budget is conservative, assuming a 2% increase in revenue from 2015 actuals and a 2.5% salary increase for all labor contracts opening on July 1,, 2016. Management expects state shared revenues to remain flat at 2015 levels. The city has also budgeted a $3.2 million drawdown of reserves that would bring combined general and public safety unrestricted fund balance to a projected 37% of spending. Typically, year-end actual results are more favorable than budgeted expectations. Management intends to budget year over year drawdowns in fund balance that would result in reaching the low end of its policy range by fiscal 2019. Fitch's rating assumes the city will continue to out-perform its budget, maintaining reserves at close to current levels while TV and general economic growth continue.

RELIANCE ON VOTER APPROVED LEVIES

Voter approved mills comprise approximately 44% of total operating millage. The bulk of the voter approved operating millages expires in 2017 and management plans to seek approval for renewal in November 2016.

LOW CURRENT DEBT BUT PENSION AND OPEB PRESSURES

The total debt burden is low, at $1,877 per capita and 2.2% of full value in fiscal 2016. Amortization is rapid, with 95% of principal retired in 10 years. The city's five-year capital improvement plan (CIP) totals a reasonable $80.5 million.

Although debt plans for capital projects are limited, management has published a notice of intent to bond for pension and OPEB unfunded liabilities. The issuance, authorized by the city commission, would be as high as $125 million or 2.5% of market value. Fitch views this plan with concern as it would convert a somewhat flexible liability (Fitch has observed many instances of governments reducing costly OPEB benefits) into a hard liability. If the city issues the full $125 million, debt service will consume a significant amount of their operating budget. OPEB costs in fiscal 2015 equaled the ARC at a high 16.6% of governmental fund spending. Per a November 30, 2015 draft actuarial report, the unfunded OPEB liability is $108 million or 11.9% of a 4-year smoothed investment funding value.

Most full-time employees are covered under the city of Royal Oak Retirement System, a single-employer defined benefit plan. Using GASB 68 reporting, assets to liabilities ratio is 66.2% as of June 30, 2015. Using a more conservative 7% rate of return, Fitch estimates the ratio to be 61.1%. In 2015, the city paid $7.098 million equal to 103% of actuarially determined contributions (ADC), or sizeable 10.8% of governmental spending. While burdensome, the city has historically funded 100% of their actuarially required contribution (ARC) and may continue to face substantial budgetary pressure despite prior attempts to reduce plan costs.

Carrying costs, including pension ARC, OPEB, and debt service, are high at 30% of fiscal 2015 governmental fund spending. Benefits changes have not materially offset the rising trend in pension and OPEB costs, as carrying cost have remained very high in each of the last three audited fiscal years.