U.S. PUBLIC FINANCE

CREDIT OPINION9 November 2018

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Washtenaw (County of) MIUpdate to credit analysis

SummaryWashtenaw County, MI (Aaa) benefits from a strong economic environment anchored bythe University of Michigan (Aaa stable) in the City of Ann Arbor (Aa1), as well as a strongdemographic profile given above average wealth and income. Strong management practicescontribute to the maintenance of healthy financial operations. The county's debt and pensionburdens are also low and fixed costs do not pose a challenge. The county’s primary creditchallenge remains constrained revenue growth due to Michigan's (Aa1 stable) statutorylimitations on taxable valuation. This causes revenue loss during times of tax base declineand slow recovery when valuation grows.

Credit strengths

» Large tax base and regional economic center with above average resident wealth andincome

» Consistently strong financial operations, and available fund and cash balances

» Low debt and pension burdens

Credit challenges

» Michigan's statutory limits on taxable valuation cause revenue loss during times of taxbase decline and slow recovery as valuation grows

Rating outlookOutlooks are typically not assigned to local governments with this amount of debt.

Factors that could lead to an upgrade

» Not applicable

Factors that could lead to a downgrade

» Material deterioration of available fund and cash balances

» Considerable growth in the county’s debt or pension burden

» Significantly weakened economic and demographic profile

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Key indicators

Exhibit 1

FM_IdWashtenaw (County of) MI 2013 2014 2015 2016 2017

Economy/Tax Base

Total Full Value ($000) $31,158,913 $32,623,337 $34,848,422 $37,246,830 $39,634,669

Population 348,560 351,454 354,092 358,082 364,709

Full Value Per Capita $89,393 $92,824 $98,416 $104,018 $108,675

Median Family Income (% of US Median) 131.5% 132.8% 132.3% 132.9% 132.9%

Finances

Operating Revenue ($000) $171,752 $177,609 $187,252 $239,909 $236,319

Fund Balance ($000) $59,521 $60,237 $59,783 $70,988 $83,147

Cash Balance ($000) $58,868 $58,413 $60,359 $79,127 $89,668

Fund Balance as a % of Revenues 34.7% 33.9% 31.9% 29.6% 35.2%

Cash Balance as a % of Revenues 34.3% 32.9% 32.2% 33.0% 37.9%

Debt/Pensions

Net Direct Debt ($000) $51,591 $50,787 $100,154 $97,168 $97,629

3-Year Average of Moody's ANPL ($000) $281,157 $313,119 $279,443 $275,327 $296,430

Net Direct Debt / Full Value (%) 0.2% 0.2% 0.3% 0.3% 0.2%

Net Direct Debt / Operating Revenues (x) 0.3x 0.3x 0.5x 0.4x 0.4x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 0.9% 1.0% 0.8% 0.7% 0.7%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 1.6x 1.8x 1.5x 1.1x 1.3x

Source: Washtenaw County MI CAFRs; Moody's Investors Service; US Census Bureau

ProfileWashtenaw County is home to 360,000 residents in southeast Michigan. The county encompasses the City of Ann Arbor, which iswhere the University of Michigan is located, and is 30 miles west of the City of Detroit (Ba3 stable).

Detailed credit considerationsEconomy and tax base: historically strong and growingWashtenaw County's $41.5 billion tax base will remain robust. Recent growth has put full valuation above its pre-recession leveland the economic profile remains strong. A combination of renowned higher education institutions and above average residentialwealth will remain economic and credit strengths. The University of Michigan and its associated medical center remain the dominanteconomic drivers within the county, given combined employment of over 30,000. The county is also home to Eastern MichiganUniversity (A2 negative), which employs 1,600 people.

The county’s strong economy will continue to support growth in property valuation, which, despite declines between 2008 and 2012,demonstrated strong recovery with a five-year compound average growth rate (CAGR) of 6%. The county’s median family income is133% of the national median.

Financial operations and reserves: financial position to remain healthyThe county is expected to maintain its strong financial profile through conservative budgeting practices and revenue stability supportedby the large, diverse economic base. The county practices conservative fiscal management that utilizes forward looking budgetingthrough multi-year operating forecasts. Revenue across core operating funds, which consist of sizable non-capital funds primarilysupported by recurring local and state revenues, grew at a CAGR of 6% that outpaced an expenditure CAGR of 5%. The result wasconsistent operating surpluses that added to the county's available reserves. Fiscal 2017 available operating fund balance was a healthy35% of operating revenue.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 9 November 2018 Washtenaw (County of) MI: Update to credit analysis

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Of the $83 million in available fund balance at the close of fiscal 2017, $30 million was in the general fund and $10 million representslegally available assets in the Delinquent Tax Fund (DTF). Although the county reserves DTF assets for debt service, these balances areindicative of strong operational flexibility. The county’s revenues are primarily driven by property taxes, which have been increasing astaxable values grow, though the pace of revenue growth is lower than the appreciation of full valuation due to statutory caps. Fiscal2018 property tax revenues will increase by an anticipated $2.3 million. Year-to-date financial information for fiscal 2018 points tobalanced operations, but it is noteworthy that the county has a history of producing operating surpluses, which is attributable to strongrevenue performance relative to conservative budget assumptions.

LIQUIDITYNet operating cash was a strong 38% of revenue and has been maintained at consistently strong levels over multiple fiscal years.

Debt and pensions: low debt and pension burdens with no material growth expectedThe county's debt and pension burdens will remain low due to level and rapid amortization of direct debt, good pension contributionrates, and no current plans to issue additional debt beyond the current 2018 bond issuance. The county’s fiscal 2017 direct debt of$97.6 million is a low 0.2% of full value and 0.4x operating revenue, and will remain low upon the 2018 bond issuance. Washtenaw’spension burden, represented by Moody’s three-year average adjusted net pension liability1 (ANPL), of $296 million is also low at 0.7%of full value and 1.3x operating revenue. Fixed costs, inclusive of annual debt service and retirement contributions, are a manageable13% of operating revenue.

DEBT STRUCTUREAll of the county’s fiscal 2017 direct debt is fixed rate, with $25.8 million backed by its general obligation limited tax (GOLT) pledge.Additional debt is comprised of $54.7 million assessment debt, of which, $18 million is a short-term note that the county issuesin anticipation of delinquent tax revenue receipts. The county has an established record of timely and sufficient short-term noterepayment, and collects delinquent taxes and associated fees in a segregated account dedicated to the repayment of the notes.Historically, the county has collected sufficient revenue well in advance of scheduled note maturities and the county's very highliquidity protects note holders against market disruptions or delays in delinquent tax collections. All of the county's outstanding debtscheduled to mature within ten years.

DEBT-RELATED DERIVATIVESThe county is not a party to any derivative or interest rate swap agreements.

PENSIONS AND OPEBThe county provides pension and other postemployment benefits (OPEB) through two defined benefits plans, the single-employerWashtenaw County Employees’ Retirement System (ERS), and the multi-employer Michigan Municipal Employees’ Retirement System(MERS). The county contributes 100% of the actuarially determined contribution (ADC), which also represents 100% of our calculationof the plans' “tread water” indicator.2 Contributing at this level is stronger from a credit perspective than contributing below this level.

As of the most recent actuarial valuation data, the county had a $118 million accrued unfunded OPEB liability. The unfunded OPEBliability is a moderate 0.5x operating revenue. Over the last couple years, the county's OPEB contributions were 5% of revenue.However, these contributions include deposits to a trust on top of annual pay-go expenses. The county's OPEB assets are currently50% of its liability.

Management and governance: moderate institutional frameworkMichigan counties have an institutional framework score of “A,” or moderate. Counties rely on property tax and state aid revenues,which in combination are moderately predictable. Counties have moderate revenue-raising ability, since they face limits on taxablevaluation growth (Proposal A) and revenue growth (Headlee Amendment). The Headlee Amendment also creates a permanentreduction in the millage rate, although voters can approve an override; additionally, the county’s sizeable reserves help it smoothrevenue volatility, which partly mitigates the effects of the restrictive revenue raising statues.

Washtenaw County benefits from several voter approved supplemental millages that sunset over a varying period of time, includingthe voter approved millage to support mental health and public safety that will be used for debt service on the Series 2018 bonds.Expenditures for Michigan counties primarily consist of public safety, court, and health care expenses, which are moderately

3 9 November 2018 Washtenaw (County of) MI: Update to credit analysis

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predictable. Counties have a moderate ability to reduce expenditures. While Michigan’s constitution provides protections for accruedpension benefits, changes can be made to future benefit accruals.

Washtenaw County has strong financial management policies, and consistently maintains strong operating balances throughconservative budgeting and the use of multi-year operating forecasts. The county's formal policy is to maintain a general fund balanceof at least 20% of the subsequent year's expenditures, but it consistently exceeds this target.

Endnotes1 Moody's ANPL reflects the use of a market based discount rate to value liabilities and is intended to facilitate comparability of rated entities in our credit

analysis

2 Our tread water indicator measures the annual government contribution required to prevent reported net pension liabilities from growing, given theentity's actuarial assumptions. An annual government contribution that treads water equals the sum of employer service cost and interest on the reportednet pension liability at the start of the fiscal year. A pension plan that receives an employer contribution equal to tread water will end the year with anunchanged net pension liability relative to the beginning of the year if all plan assumptions hold. Net liabilities may decrease or increase in a given yeardue to factors other than the contribution amount, such as investment performance that exceeds or falls short of a plan's assumed rate of return. Still,higher contributions will always reduce unfunded liabilities faster, or will allow unfunded liabilities to grow more slowly than lower contributions. Thedegree to which contributions fall below the “tread water” indicator can help quantify a structural operating imbalance stemming from pensions, evenunder reported assumptions. A contribution below the “tread water” level in effect suppresses expenditures by leaving implied interest on net pensionliabilities unpaid, akin to borrowing at the assumed rate of investment return for operations. For additional detail behind the “tread water” indicator, seeour April 2016 report, “FAQ: Improved GASB Pension Disclosure Does Not Eliminate Need for Adjustments.”

4 9 November 2018 Washtenaw (County of) MI: Update to credit analysis

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6 9 November 2018 Washtenaw (County of) MI: Update to credit analysis