Lake Michigan College, Michigan; General Obligation

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1 Summary: Lake Michigan College, Michigan; General Obligation Primary Credit Analyst: Katilyn Pulcher, ASA, CERA, Chicago (1) ; Secondary Contact: Carol A Hendrickson, Chicago (1) ; carol.hendrickson@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research JANUARY 27,

2 Summary: Lake Michigan College, Michigan; General Obligation Credit Profile US$ mil coll bldg & site bnds (GO ltd tax) ser 2014 due 09/01/2045 Long Term Rating AA+/Stable New Lake Michigan Coll Dist coll bldg & site bnds (ltd tax GO) Long Term Rating AA+/Stable Affirmed Rationale Standard & Poor's Ratings Services assigned its 'AA+' long-term rating to Lake Michigan College, Mich.'s series 2014 limited-tax general obligation (GO) college building and site bonds. At the same time, we affirmed our 'AA+' long-term rating on the college's previously rated GO bonds. The outlook is stable. The rating reflects our view of the college's: Very strong wealth, as measured by per capita market values; Very strong operational reserves; Good financial management; and Low-to-moderate overall net debt burden. The rating strengths are tempered, in our view, by a limited economy centered on manufacturing industries and below-average, albeit adequate, incomes. The college's limited-tax GO pledge secures the bonds. Officials intend to use bond proceeds to finance the acquisition, construction, equipping, and furnishing of student housing at the Napier Avenue Campus. Management indicated the maximum occupancy of the new residence hall is 188 but that it only needs 78 to break-even, operationally. If revenues are insufficient, management has indicated it would use some of its ample reserves to cover bond payments until dorm operations could be restructured to be profitable. Lake Michigan College's 263-acre main campus is in northern Berrien County, east of St. Joseph and Benton Harbor, but the college also serves portions of Van Buren County. Berrien County's incomes are adequate, in our view, with median household income equal to 84% of the national average. The district population, according to the 2010 U.S. Census, is 172,875. The college offers job training and apprentice programs, as well as academic courses for students intending to continue at a four-year institution. Whirlpool Corp. is headquartered in the county and management reports over 3,400 employees in the community are employed there, with 1,000 at the headquarters building. The company expects to add 180 employees in refrigeration this spring. Management indicates 60 students at the college are currently working on their associate's degrees through the corporate university run by the college for Whirlpool. JANUARY 27,

3 Summary: Lake Michigan College, Michigan; General Obligation The leading employer in the district is Lakeland Region Health Systems (3,248 employees). Lakeland recently completed construction of a multimillion-dollar cancer center and hospice residence center. In response to this growth, the college developed a new Nursing Education Center and new nursing programs, which are offered through the newly opened Healthcare Education Institute. Management reports enrollment in the institute has exceeded expectations. The college also offers associate's degrees in Energy Production and Power Production Technology, and representatives from local power plants provide their input in the coursework. America Electric Power Co. is the second-largest employer in the area, with 1,241 employees. Management also reports the manufacturing industry has stabilized in the district, and enrollment in manufacturing classes and apprenticeships has increased. Berrien County unemployment was 9% in 2012, in line with the state average of 9.1% but much higher than the national average of 8.1%. The Harbor Shores Development is a large project that stands to further boost the district's economy. It includes construction of a marina, hotel, and resort. A golf course and clubhouse have already been built, and the senior PGA championship was hosted there in May The college added an associate's degree in Applied Science - Culinary Management in the fall of 2013 to support this growing hospitality industry and achieved the enrollment it had projected. Management indicates vacation and primary homes and properties in the areas surrounding Harbor Shores continue to be developed at a steady pace. The tax base has been stable for the past four years. Taxable value (TV) increased 1.6% in 2012 to $8.4 billion in 2013 for taxes payable in Market value in 2013 is roughly equal to the prior-year value of $20.8 billion, or $120,159 per capita, which we consider extremely strong. Management indicates the residential market is improving, both in number of homes sold and the price of those homes, and that it expects slight increases in property values in the next few years as a result. The 10 leading taxpayers in the district account for 12.5% of total TV, which we consider very diverse. With enrollment at community colleges countercyclical to the local economy, enrollment has begun to decline due to the rebounding state and national economies. As the economy bounces back, stimulus, back-to-work, and recovery dollars from the federal government dry up and enrollment follows suit. The college switched from tracking enrollment based on credit hours to tracking it based on contact hours (i.e., hours of instruction) in fiscal Contact enrollment declined from 102,549 in fiscal 2010 to 95,377 in fiscal Management expects a 3% decline in enrollment in fiscal 2014, stable enrollment in fiscal 2015, and modest increases thereafter. The projected increases are due to more aggressive recruiting efforts, expanded course offerings, the expected opening of the college's first residence hall this summer, and new athletic programs. Management also indicated that the financial effects of any declines in enrollment to date have been mitigated by reductions in adjunct instructor staff. In the state of Michigan, tuition rate increases are unlimited. Lake Michigan College's board approves tuition rates for the upcoming fiscal year every March. In recent years, the board has raised tuition by a few dollars per year. Currently, tuition rates are $87 per credit hour for in-district students, $ for service-area (in-state but out-of-district) students, and $ for out-of-state students. The approximate average tuition and fees for an in-district student at one of the 28 community colleges in Michigan for the school year is $110. At a minimum of $129, the tuition and fees for an in-district student at Lake Michigan College are well above average. JANUARY 27,

4 Summary: Lake Michigan College, Michigan; General Obligation Lake Michigan College's financial position has remained solid for the past few years, with very strong reserves in the operating funds (general, auxiliary, and plant funds). Nearly all of the college's general fund revenues come from tuition and fees (92% in fiscal 2013). The district has reported operating surpluses every year since fiscal 2008 and expects to report a $322,000 operating surplus in fiscal In the most recent audit (June 30, 2013), the college reported a $1.9 million operating surplus, bringing its unrestricted fund balance to $11.4 million, or 35% of expenditures, which we consider very strong. Management attributes the surplus to health insurance cost-containment initiatives, holding positions vacant, noncredit tuition and fees in the workforce training and development field (related to a marketing push), and partial pension subsidies form the state. No staff reductions have taken place since fiscal 2012, nor are any future ones currently planned, according to management. While the 2015 budget has not yet been finalized, management indicates it would not budget for a surplus of less than 1% of expenditures. Additionally, management does not expect any negative effects of sequestration in fiscal We consider Lake Michigan College's financial management practices "good" according to Standard & Poor's Financial Management Assessment methodology, indicating practices exist in most areas, though not all might be formalized or regularly monitored by governance officials. In formulating its revenue and expenditure assumptions for the current-year budget, management analyzes three to five years of historical data and uses a combined zero-based and line-item budgeting approach. The college maintains its own investment policy and provides quarterly reports on investment holdings and earnings to the board. Similarly, budget-to-actual reports are provided to the board monthly. Management maintains its own five-year financial plan and three-year information strategic plan, and it receives a five-year facilities plan from an outside organization. All three plans are reviewed at least annually. The college has its own debt management policy, and, while no formal reserve policy has been adopted, management reviews key financial indicators to compare its reserves to industry benchmarks. The college's overall net debt burden is, in our opinion, low, at 1.7% of market value, and moderate, at $2,045 per capita. Amortization is slow, in our view, with 41% of direct debt scheduled to be retired over 10 years and 69% over 20. Almost all of the college's debt is attributed to overlapping debt. We understand that the college has no concrete plans to issue additional debt at this time but may issue bonds for HVAC updates within the next two years if alternate financing cannot be arranged. The college participates in the Michigan Public School Employees' Retirement System (MPSERS), which provides both pension and other postemployment benefits (OPEBs). Lake Michigan College contributed $1.6 million to the plan for pension benefits and $742,000 for OPEBs in fiscal The combined contributions equaled 5.8% of total operating expenditures in fiscal Outlook The stable outlook reflects our expectation that we will not change the rating during the outlook's two-year horizon, given our anticipation that the college will maintain structural balance and very strong reserves. While we do not expect to change the rating, we could lower it if reserves were to deteriorate substantially, whether due to lower-than-expected occupancy at the new residence hall or otherwise. We do not expect the district's economic characteristics to materially change within the next two years, limiting, in our view, the college from a higher rating. JANUARY 27,

5 Summary: Lake Michigan College, Michigan; General Obligation Related Criteria And Research Related Criteria USPF Criteria: GO Debt, Oct. 12, 2006 USPF Criteria: Key General Obligation Ratio Credit Ranges Analysis Vs. Reality, April 2, 2008 Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. JANUARY 27,

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