Fitch Affirms Kellogg Comm College, MI's LTGO Bonds 'AA-'; Outlook Stable.

AUSTIN, Texas -- In the course of routine surveillance, Fitch Ratings affirms its 'AA-' rating on Kellogg Community College, Michigan's (the college) approximately $6.3 million in outstanding community college improvement bonds, series 2000 and 2002 (limited tax general obligation [LTGO). The college, a local government unit with taxing powers and has pledged its limited full faith and credit to repay the bonds. The college is obligated to levy sufficient ad valorem taxes on all taxable property within its boundaries, subject to constitutional and statutory limits. The Rating Outlook is Stable.

The 'AA-' rating reflects the college's positive financial performance and limited amount of debt outstanding with no additional borrowing planned. Financial operations have been aided by annual tuition increases as well as growth in credit hours. The college maintains operating flexibility since many teaching professionals are part-time and the extensive curricula may be consolidated to help offset pressures stemming from the state's budgetary challenges and a weakened regional economy. The college is subject to operating levy and tax rate limits, with capital needs supported by a voter approved tax millage. Maintenance of satisfactory financial performance remains a key credit consideration.

The Kellogg Community College is a multi-campus college in Michigan serving approximately 140,000 residents primarily in Calhoun County. Through its five locations and extensive course offerings, the college also serves portions of Branch, Barry, Kalamazoo, Hillsdale, and St. Joseph Counties. For the 2008-2009 school year, the unduplicated student count stood at nearly 14,000, down 6.8% from the prior year; for the 2009-2010 school year, the unduplicated student count is projected to grow by 6%. Although unduplicated student counts have fluctuated from year to year, the college continues to experience growth in credit hours.

Financial operations are supported from a variety of sources, including tuition and fees, state appropriations, and property taxes. Tuition revenues continue to grow, reflecting larger than usual rate increases over the past several years as well as growth in credit hours. However, despite these increases, the college's tuition rates reportedly remain among the lowest in the state. The large increase in state appropriations in fiscal 2008 is due to the receipt of state's deferment of a fiscal 2007 payment. Property taxes accounted for nearly 29% of operating revenues in fiscal 2008, and 4.4% increase over the prior year primarily reflects growth in taxable values.

For the close of fiscal 2008, the college posted an 11.9% operating margin. Net assets increased by $5.5 million while unrestricted net assets grew by $200,000. Although fiscal 2009 results are not available (year ending June 30), officials expect to record another increase in net assets. The fiscal 2010 budget is essentially balanced and incorporates flat state appropriation revenues; however, the college now believes that it will receive a slightly higher than budgeted award.

The college has financed its modest capital initiatives without the extensive use of debt. In 1998, district voters approved an increase in operating millage rates to support debt service on outstanding bonds as well as provide pay-as-you-go financing for the 21st Century Project (the project), a program designed to renovate and expand college facilities. Officials estimate that the voted millage will generate approximately $41 million through 2013 (when the millage expires) and combined with state, private, and college contributions, a total of $58 million will goes toward funding the project. As a result, debt ratios are modest, with all outstanding bonds repaid by 2013. Further, no additional borrowing is planned.

Historically, the college's tax base has shown moderate annual gains averaging 4% from 2003-2008. For the December 2009 equalized valuation, officials are expecting a slight decline in both taxable and state equalized valuations, reflecting the weakened economic profile of the region. The service area is relatively diverse and includes food production, government, education, and healthcare. In addition, the Battle Creek area includes several large auto parts manufacturing entities, which poses some economic risks. Calhoun County unemployment rates have climbed to double-digit levels, with the August 2009 rate at 12.5%, up from 7.9% a year ago at this time. However, the unemployment rate remains below the statewide average of 14.7%. Wealth indicators are below state and national norms.

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