March 6, 2012

Summary:

Allen Park City, Michigan; General Obligation; General Obligation Equivalent Security
Primary Credit Analyst: Caroline West, Chicago 312-233-7047; caroline_west@standardandpoors.com Secondary Contact: Christopher Krahe, Chicago (1) 312-233-7063; christopher_krahe@standardandpoors.com

Table Of Contents
Rationale Related Criteria And Research

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Summary:

Allen Park City, Michigan; General Obligation; General Obligation Equivalent Security
Credit Profile
Allen Pk City GO Unenhanced Rating B(SPUR)/Watch Neg Downgraded, On CreditWatch Negative

Rationale
Standard & Poor's Ratings Services lowered to 'B' from 'BB+' its long-term rating on Allen Park City, Mich.'s unlimited-tax general obligation (GO) bonds and limited-tax GO bonds, issued for the city by itself, the Allen Park Building Authority, and the Allen Park Brownfield Redevelopment Authority. Standard & Poor's also placed these ratings on CreditWatch with negative implications. On Feb. 17, Standard & Poor's affirmed the city's rating based on our view of information provided by management that the city would issue long-term budget stabilization bonds in order to meet its debt service obligations in fiscal 2012 (year-end June 30); subsequent information after that date revealed that the city's original course of action would not occur. Instead, management informs us that the city now plans to issue tax anticipation notes (TANs) and subsequently roll over the TANs with an emergency loan from the state. However, the city council has yet to approve an application for the TANs to send to the state for its review, and we understand that discussions regarding the emergency loan have yet not begun with the state. In our opinion, uncertainty remains as to how the city will acquire the funds necessary to meet its financial obligations for fiscal 2012. Without an external source of additional liquidity, we believe that the city will likely be unable to make its debt service payment on May 1, 2012. We anticipate resolving the CreditWatch listing on Allen Park's debt upon determining the success of the city's issuance of TANs. Even if the city issues TANs and successfully meets its fiscal 2012 obligations, in our view, the city still faces severe long-term budget pressure given its lack of revenue and expenditure flexibility. The 'B' rating further reflects our view of: The city's depleted general fund balance, in part due to a rapid decrease in property values, which has deteriorated a major general fund revenue source; Insufficient lease revenues to support debt service, leading to significant supplemental support from the general fund in order to make principal and interest payments on debt outstanding; The city council's plan to issue debt in fiscal 2012 to cover financial obligations, despite voter approval in November 2011 of additional property tax millage to support public safety services; and A current budget gap of $4 million for fiscal 2013, which officials intend to resolve through a combination of approaching voters for additional property taxes and union contract adjustments, the success of which are highly uncertain.

Standard & Poors | RatingsDirect on the Global Credit Portal | March 6, 2012

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Summary: Allen Park City, Michigan; General Obligation; General Obligation Equivalent Security

The city significantly increased its leverage in recent years, issuing approximately $30 million in limited-tax bonds to support a real estate development in the city's downtown development authority, with the expectation that lease revenues from tenants would be sufficient to support debt service payments. However, to date, the project is not self-supporting, generating only enough revenue to cover roughly 25% of debt service payments, according to the city. At this time, the main tenants are Roush Automotive and the Stautzenberger Institute, an occupational education provider. Given that the development has not produced the rental payments necessary to pay debt service, the project, which is accounted for in the city's Southfield Lease Properties Fund (SLPF), received $1.6 million from the general fund to support operations and debt service during fiscal 2011. However, the general fund no longer has the liquidity available to continue supporting this fund, and in order to pay debt service, officials plan to issue TANs and then receive an emergency loan from the state. Partially offsetting the above factors is our view of: Access to employment throughout the Detroit metropolitan area and Good income and strong wealth levels as represented by median household effective buying income and market value per capita, despite falling property values. The city is located about 12 miles southwest of downtown Detroit in southeastern Wayne County. Since 2000, the city's population has fallen by 18% to 24,170. Unemployment in the city has historically been low and was only 4.7% in December 2011, significantly below the statewide 9.3% rate. Employment in the area has been concentrated in automotive manufacturing, with Ford Motor Co. being the most significant employer in the city. Standard & Poor's considers income levels in the city to be good, with effective buying income at 109% of national levels. The tax base declined 6.6% during 2011 to reach $843.8 million, and management anticipates a 10.8% decrease during 2012. Tax base declines lead to direct property tax revenue reductions for the city, and given that property taxes make up more than half of general fund revenue (54% in fiscal 2011), we consider the contracting tax base as an important credit factor. Despite the losses, on a per capita basis, market value remains strong in our view, at $71,600. Allen Park's reserve levels had historically remained strong, despite financial pressures, until fiscal 2011, when all available liquidity was used in order to meet operational and debt service obligations. The fund balance declined by $3.2 million to a total of $505,000. Of that amount, $1.1 million is nonspendable or committed, while a negative $590,000 is unassigned, equivalent to negative 3.2% of expenditures. The significant reserve usage is tied to decreasing property tax revenue, support of the SLPF, and a lack of expenditure cuts. The budget gap from fiscal 2011 persisted in fiscal 2012, with a beginning budget hole of $4.7 million. New management in the city, both elected and appointed, made efforts to enhance revenues and cut costs, reducing the initial budget gap by over half. In early fiscal 2012, voters approved a continual property tax increase of 3.3 mills in order to support public safety services; at the same time, they rejected a 2.3 millage that would have supported debt service on the SLPF. Management also cut expenditures across the board, including closing city hall one day a week and eliminating part-time workers. Even after these adjustments, however, the city remains short the roughly $2 million required to support the SLPF annual debt service. Perceiving no possible additional expenditure cuts, given already-reduced service levels and restrictive labor contracts, management plans to issue approximately $2.1 million in TANs, later to be taken out with an emergency loan from the state, to plug the remaining budget gap for fiscal 2012.

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Summary: Allen Park City, Michigan; General Obligation; General Obligation Equivalent Security

With further property tax contraction projected, along with inflationary expenditure increases, management currently estimates a starting budget gap of $4 million for fiscal 2013. We understand that officials have no intention of issuing a second round of TANs and are instead committed to achieving cost savings through labor contract negotiations and going back to voters in May 2012 to request a four-year, 4 mill property tax increase to temporarily cover annual SLPF debt service. However, both of these remedies are uncertain. If even one of the two fails, we anticipate that the city will have few options left to close the ongoing budget gap. Allen Park City's financial management practices are considered "standard" under Standard & Poor's Financial Management Assessment methodology, which indicates that, in our view, the finance department maintains adequate policies in most but not all key areas. The city's overall net debt burden is moderately high, in our opinion, at 7.1% of market value and $5,511 per capita. Although the city's debt service carrying charge is low when considering only governmental funds, including the general obligation debt in the SLPF raises it to 11.9% of governmental expenditures in fiscal 2011, which we consider moderate. The city is responsible for providing both post-employment health care and pension benefits. As of 2009, the most recent actuarial report, it had funded none of its $129 million health care-related liability. As of 2010, the city had funded 79% of its $99 million pension-related liability.

Related Criteria And Research

USPF Criteria: GO Debt, Oct. 12, 2006 Ratings Detail (As Of March 6, 2012)
Allen Pk City GO ltd tax Long Term Rating Allen Pk City GO unltd tax (AMBAC) Unenhanced Rating B(SPUR)/Watch Neg Downgraded, On CreditWatch Negative B/Watch Neg Downgraded, On CreditWatch Negative

Allen Pk City GO Unenhanced Rating Allen Pk Bldg Auth, Michigan Allen Pk City, Michigan Allen Pk Bldg Auth (Allen Pk City) go ltd tax rfdg bldg bnds (Dist Court Fac) ser 2003 dtd 04/01/2003 due 06/01/2004-2014 Unenhanced Rating Allen Pk Brownfield Redev Auth, Michigan Allen Pk City, Michigan Allen Pk Brownfield Redev Auth ltd tax GO redev bnds Unenhanced Rating B(SPUR)/Watch Neg Downgraded, On CreditWatch Negative B(SPUR)/Watch Neg Downgraded, On CreditWatch Negative B(SPUR)/Watch Neg Downgraded, On CreditWatch Negative

Standard & Poors | RatingsDirect on the Global Credit Portal | March 6, 2012

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Summary: Allen Park City, Michigan; General Obligation; General Obligation Equivalent Security

Ratings Detail (As Of March 6, 2012) (cont.)

Many issues are enhanced by bond insurance.

Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

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Standard & Poors | RatingsDirect on the Global Credit Portal | March 6, 2012

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