Fitch Ratings last week revised its outlook to negative on Kalamazoo while affirming its AA-plus rating on much of the city's outstanding bonds.
The revision comes as the city prepares to sell $6.2 million of refunding bonds issued through the Kalamazoo Building Authority. The bonds are scheduled to sell this week, and the city will use the proceeds to refund outstanding debt issued in 1997, 1998, 2001, and 2002.
The negative outlook reflects the city's struggle to achieve the balanced operations that correspond to its AA-plus rating level, according to Fitch.
"Fitch is concerned that spending pressures coupled with tax-base deterioration could strain the city's ability to achieve structural balance and build reserves," analysts wrote in a recent rating report.
On the plus side, Kalamazoo's pension obligation was 142% overfunded as of December 2009, and its debt burden is relatively low. Amortization of its principal is rapid, with 75% retiring within 10 years, according to Fitch. Nearly 65% of its debt is currently self-supporting.
Pressures include a fiscal imbalance over the last three years and an above-average jobless rate of 12.4% as of November.
The city's managers need to try to restore and maintain balanced operations going forward to avoid a downgrade, analysts warned. City officials said they expect a $1.1 million operating surplus by the end of fiscal 2011, but that will largely be met with a one-time $4 million transfer from the city's insurance fund.
"The city's ability to generate balanced operations from recurring sources in the near term is essential to maintaining the current rating level," analyst James Mann wrote.
The bonds are secured by cash rentals under a lease agreement between the authority and the city. The cash rentals are backed by Kalamazoo's full faith and credit and its ad valorem tax.
