OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following Battle Creek, Michigan (the city) bonds:

--$13.5 million limited tax refunding general obligation bonds (LTGO), series 2016.

The bonds are expected to price the week of March 15, 2016. Proceeds will refund a portion of LTGO, series 2013 bonds for expected positive net present value savings.

Additionally, Fitch affirms the 'AA' ratings on the following Battle Creek, MI bonds:

--$14.2 million LTGO bonds, series 2013;
--$9.29 million LTGO refunding bonds, series 2011;
--$33.4 million LTGO Battle Creek downtown development bonds, series 2008;
--$5.5 million LTGO Battle Creek tax increment finance authority bonds, series 2009 and 2010;
--$4 million LTGO Battle Creek building authority bonds, series 2008.
--Implied unlimited tax general obligation bonds (ULTGO) rating.

The Rating Outlook on all debt is revised to Negative from Stable.

SECURITY
All LTGO bonds are ultimately payable from 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 and the tax increment finance authority bonds are payable in the first instance by a pledge of tax increment revenue. The building authority bonds are additionally backed by lease payments from the city to the authority. The obligation to make the rental payments is not subject to appropriation, set-off or abatement for any cause.

KEY RATING DRIVERS

INCREASED OPERATING PRESSURE DRIVES OUTLOOK: The Negative Outlook primarily reflects Fitch's concerns about the increasing budget challenges posed by the combination of increasing fixed costs and stagnant revenue growth driven by a weakening tax base.

SATISFACTORY FINANCIAL PERFORMANCE: The city has steadily maintained solid reserves as a percentage of spending and improved liquidity metrics despite limited revenue growth.

EXPENDITURE CONTROLS KEY: Management has had to employ extensive financial and capital planning tools to control expenditures given the city's susceptibility to revenue declines in a weakening local economy Fitch believes management will continue to be challenged to maintain balance as fixed costs grow.

ABOVE-AVERAGE TAX BASE CONCENTRATION: The city's top 10 taxpayers represent over one-quarter of the tax base. The top three taxpayers, Kellogg Company, Denso Manufacturing, and Kraft Foods Inc., equal nearly one-fifth of the total taxable assessed value (TAV). The outcome of a large pending tax appeal has the potential to negatively affect the city's TAV.

BELOW-AVERAGE SOCIOECONOMIC PROFILE: Unemployment rates are on par with the state and nation; however income levels are well below state and national levels.

MANAGEABLE DEBT AND PENSIONS: The city's debt profile is moderate and benefits from a practice of pay-as-you-go capital investment, rapid amortization of debt, and modest future borrowing needs. Pension liabilities and carrying costs are sizable and increasing.

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 a margin of taxing capacity under statutory limits.

RATING SENSITIVITIES

MAINTAINING STABLE OPERATION WITH LIMITED REVENUE GROWTH: The rating is sensitive to management's ability to continue to adjust operating spending to offset growth in fixed costs and a flat to declining revenue trend. Evidence of a decline in budgetary flexibility, including a drop in cash or reserves, could result in a rating downgrade.

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 52,000 over the past three decades.

CONCENTRATED MANUFACTURING BASED ECONOMY

Manufacturing, especially in the food services industries, underlies the city's economy. The city's tax base reflects this concentration, with the top 10 taxpayers accounting for a high 27.78% of total TAV. Kellogg Company (Issuer Default Rating 'BBB'; Outlook Stable)has a large presence in the community, serving as both the city's largest taxpayer at 9.5% of TAV for 2015 and the largest employer with 2,279 employees. The company has filed a large tax appeal which could negatively impact the city's TAV.

Other top employers include auto parts maker Denso Manufacturing Michigan Inc., which further contributes to the cyclical nature of the local economy, as well as medical services firms and government sector employers, which provide some measure of stability. Job growth has been slow to recover from the recession but may increase over the near term given private investment over the past few years.

MODERATE TAXABLE VALUE DECLINES; BELOW AVERAGE WEALTH LEVELS

Battle Creek's tax base continues to decline, with a modest 1% drop in TAV in fiscal 2016 following declines of 6.4% since 2012. City officials project modest TAV growth in the near future, although Fitch is not assuming meaningful expansion in our rating. Property tax collection rates stayed strong through the recession and remain above 99%.

The city's 4.6% December 2015 unemployment rate is on par with state and the nation, at 4.5% and 4.8%, respectively, in contrast to historical trends of local unemployment notably above the broader indices. City wealth levels are below average, with median household income levels at 68% of the state average.

EXPOSURE TO TAX INCREMEMT SHORTFALLS

The city's tax increment districts (TIFA and 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 city general fund support. DDA debt service payments escalate over the intermediate term, and flat increment revenues are expected to provide about 0.9x coverage in fiscal 2017.

Kellogg Company, which accounts for 45.99% of the DDA taxable values, has a $25 million tax appeal pending which could potential to negatively affect future incremental tax revenues used for the repayment of TIFA bonds. The current rating incorporates the expectation of modest general fund support for debt service and operations. Declining DDA revenues are expected to cover debt service payments in fiscal 2016, but ongoing declines resulting in draws upon the general fund to support DDA debt service could pressure the rating.

STABLE OPERATIONS DESPITE SLUGGISH REVENUE GROWTH

City operations have remained despite sluggish performance of city revenues. Total general fund revenues decreased of 1.3% in fiscal 2015 despite a 2.25% increase in income taxes, as property taxes and administrative fees and reimbursements declined. The city had large income tax declines during the recession reflecting the economically sensitive nature of this revenue source. In order to offset potential revenue volatility, the city maintains excess property tax levy capacity. Under Headlee's roll-back limits for operations, the city has a 1.1222 millage rate (9.8%) margin which would generate an additional $1.7 million; 4% of fiscal 2015 revenues.

Fiscal 2015 ended with $7.4 million in available general fund balance, a solid 17.5% of general fund spending. The year ended with a modest $180,304 draw on general fund reserves, less than half of the original appropriation. The positive budget variance resulted from expenditure controls (including maintaining employee vacancies) and low fuel costs. General fund liquidity remains healthy despite a modest $439,141 decrease in general fund cash balance. The city has satisfactory cash for operations under the city's pool cash program which consisted of $18 million (223 days of operations) in total governmental funds.

The fiscal 2016 budget increased by 1% and is funded without a fund balance appropriation or property tax rate increase. The fiscal 2016 budget included $650,000 for expenditures related to the central business district that had previously been funded by the DDA. Management reports that to date fiscal 2016 results have outpaced those of fiscal 2015 on a year-to-date basis. Fitch will continue to monitor ongoing operations, as management's ability to match expenditures with recurring revenues is a key credit consideration, especially given the importance of an elastic income tax to the city's revenue base.

MODERATE DEBT BURDEN, RAPIDLY AMORTIZING DEBT BUT LARGE PENSION COSTS

Total city debt levels are moderate to above average at $3,306 per capita or 5.4% of market value, including the current offering. Principal amortization remains rapid with 85.4% repaid within 10 years. The city's current capital improvement program calls for $192.3 million in improvements over five years across tax and revenue-supported funds, with minimal expected tax-supported debt as the city funds capital improvements from its annual budget.

The city provides employment benefits to its public safety staff through a single-employer defined benefit pension plan, which was adequately funded at as of June 30, 201. This plan assumes a 7% rate of return, the city participates in the Municipal Employees Retirement System of Michigan (MERS), a state run multiple employer pension plan. The city's portion of the state pension liability is funded at a much weaker 64.35% at an assumed 8.25% rate of return despite fully funds its actuarial required contribution. Overall, the city's combined net pension liability, adjusted to a combined 7% rate of return is 69.6% funded.

The city has negotiated employee benefit concessions and eliminated some benefits for new hires, but these are expected to have minimal near-term benefit to the city's OPEB profile. The city has advance funded a portion of its OPEB UAAL, with approximately 53%, 70.8% and 90% of its ARC paid in fiscal 2013, 2014 and 2015, respectively. The city's OPEB trust, last valued in June 30, 2013, was a mere 9.8% funded but does not reflect the advance funding in fiscal 2014 and 2015; the most recent OPEB UAAL (June 30, 2013) was $37.5 million.

Overall carrying costs, including LTGO and tax-increment debt service and pension ARC and other post-employment benefits (OPEB) actual payments, are sizable at 21% of governmental expenditures (net of capital spending) but are expected to increase with a growing pension liability and ascending debt service schedule.