NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on the following Cleveland, Ohio's (the city) limited tax general obligation (LTGO) bonds:
--$2.750 million, series 2003
--$2.315 million, series 2004
--$11.605 million, series 2005A
--$34.505 million, series 2007A
--$1.770 million, series 2007B
--$20.540 million, series 2007C
--$9.205 million, series 2008A
--$48.830 million, series 2009A
The Rating Outlook is Stable.
SECURITY
The bonds are unvoted general obligations of the city secured by ad valorem property taxes within the 10-mill property tax limitation and municipal income taxes pledged under the city's general bond ordinance. The city may also use any available funds (state disbursements, interest earnings, all non-tax revenues) for debt service.
KEY RATING DRIVERS
IMPROVING OPERATIONS/ADEQUATE RESERVES: Higher income taxes as a result of increased economic activity combined with conservative budgeting and expense control have improved financial operations and strengthened reserve levels to adequate levels.
RELIANCE ON INCOME TAX: The city's finances are reliant on economically sensitive income tax revenues which have historically fluctuated with economic cycles and leave the city's finances vulnerable during downturns.
DIVERSE ECONOMY SLOWLY RECOVERING: The city has been diversifying its economy away from manufacturing to the more stable and strong health and education sectors. The recovery from the recession has been slow but economic development is notable with several significant projects nearing completion or under construction.
WEAK SOCIOECONOMIC PROFILE: The city's weak socioeconomic profile is characterized by a declining population, above-average unemployment, below-average income levels, and poverty levels that are more than double those of the state and nation.
MANAGEABLE DEBT PROFILE: Debt ratios are mixed with debt per capita moderate and debt to full value above-average. Positively, debt amortization is rapid, and carrying costs associated with debt service, pension contributions, and other post-employment benefit (OPEB) payments are manageable.
RATING SENSITIVITIES
MAINTENANCE OF RESERVE LEVELS: Given limited recurring revenue-raising ability and reliance on economically sensitive income taxes, rating stability will depend on management's ability to manage expenditures and maintain adequate reserve levels.
CREDIT PROFILE
The city is located in northeastern Ohio on the southern shore of Lake Erie and is the county seat of Cuyahoga County (LTGOs rated 'AA+' by Fitch). In 2010, the city's population totaled 396,815, a significant decline of 17% since 2000.
IMPROVING OPERATIONS/INCOME TAXES REBOUNDING
Following three years (2007 - 2009) of general fund operating deficits (after transfers), city finances improved in 2010 and 2011 (year-end Dec. 31) as a result of a combination of expenditure reductions, revenue enhancements (garbage collection fee), and an increase in income tax receipts.
The city recorded operating surpluses of $6.7 million and $20.8 million, in 2010 and 2011, respectively. Positively, general fund income tax receipts increased by $10.5 million or 3.9% from 2010, reflecting increased economic activity. Income tax is the largest general fund revenue source at 57%. However, property tax receipts, which comprise 7.5% of general fund revenues, decreased by 5.0% in 2011 as a result of the phase out of the tangible personal property tax and a decrease in property valuations. Reduced staffing levels and larger employee contributions toward health care premiums resulted in a 1.8% decrease in general fund expenditures in 2011.
The implementation of GASB 54 reclassified certain special revenue funds into the general fund resulting in an $18.3 million positive restatement of the beginning 2011 general fund balance. The city ended 2011 with a $51.0 million unrestricted general fund balance (the sum of committed, assigned, and unassigned balances under GASB 54), equivalent to an adequate 10.7% of general fund spending. Additionally, $5.0 million was transferred into the rainy day reserve fund, bringing its balance to $13.5 million or 2.9% of general fund expenditures. A city ordinance requires a 2% reserve, with a goal of 5%.
STRONG 2012 BUDGET RESULTS
On a budgetary basis, excluding transfers in, 2012 general fund revenues exceeded the budget by 6.1% or $29 million, primarily due to higher income taxes. Income tax receipts exceeded the budgeted amount by 7.1% and were back to pre-recessionary levels. Excluding transfers out, 2012 general fund expenditures produced a positive variance of $17.6 million. The net operating surplus after transfers totaled $31.5 million, but was helped by a $14 million non-recurring land sale. The unencumbered cash balance at Dec. 31, 2012, totaled $50.6 million, or 10.4% of expenditures. GAAP results are projected to be similar.
EXPENDITURE CHALLENGES FOR 2013
The city practices conservative budgeting and typically budgets use of cash balance, with actual results proving much better. The 2013 general fund budget keeps income tax receipts flat, funds vacant positions (145) - even though only a handful will be filled, and does not budget for potential land sales. For 2013, general fund revenues and expenditures (excluding transfers) are budgeted to decrease by 2.4% and increase by 8.2%, respectively. Expenditure increases are due to several factors including an increase of 25 police officers, additional ambulances and a 27th pay period. After transfers, the unencumbered cash balance is budgeted at a low $4.0 million. Positively, the city has budgeted for a $5.0 million deposit to the rainy day reserve fund, which would bring the total to $18.5 million or 3.4% of budgeted general fund expenditures.
Given management's history of prudent financial management, Fitch expects the city to continue to maintain adequate reserve levels through expenditure controls and conservative budgeting. This will be crucial to maintaining the rating at the current level.
DIVERSE ECONOMY WITH NOTABLE DEVELOPMENT
As one of Ohio's largest metropolitan areas, Cleveland benefits from a measure of scale and diversity. Over the last two decades, the city has diversified its economy from dependency on manufacturing towards the more stable education and health care sectors. Education and health services comprise 19% of the workforce with manufacturing representing 12%, down from 17% in 2000. The Cleveland Clinic is the largest private employer with approximately 34,000 employees, providing stability. Other large employers include University Hospitals of Cleveland (13,726), KeyCorp (5,827) and Case Western Reserve University (4,620).
Economic development is a key focus of Cuyahoga County management and supported by county residents as evidenced by a recently voter-adopted resolution to include economic development as a core function of the county charter. The city has benefited from this strategy. Construction is currently underway on a $465 million Medical Mart/Convention Center, which the county is funding through bonds and non-tax revenues. The center will be located in downtown Cleveland with a projected opening in June 2013, and will be a showcase for medical technology. It is expected to be the foremost regional facility for conventions and medical trade shows, further enhancing Cleveland's healthcare sector.
In addition to the Medical Mart/Convection Center project, several other large projects are currently in construction including the $272 million Flats East Bank mixed use project being built in an industrial area of Cleveland along the Cuyahoga River with a projected opening in spring 2013. The temporary site of the $350 million Horseshoe Casino opened in March 2012, with the permanent site projected to open in the next few years with expected employment of up to 1,600 people.
WEAK SOCIOECONOMIC PROFILE
Despite the diversification, and characteristic of an urban population, the city continues to struggle with above average unemployment rates and weak socioeconomic indicators. For December 2012, the city recorded an unemployment rate of 8.5%, higher than the 6.6% and 7.6% for the state and nation, respectively. A drop in the rate from the 9.5% in December 2011 was due to a 3.7% year-over-year decline in the labor force. City income levels, as measured by 2012 per capita income, were low at 65% and 60% of state and national averages, respectively. Poverty levels remain high at more than double state and national levels.
MODERATE DECLINE IN ASSESSED VALUE
Assessed valuation declined a moderate 13% since 2007 with a slight decline in 2012 as a result of a sexennial valuation. Fitch expects assessed value to stabilize or increase modestly given the ongoing commercial development and some moderation from high foreclosures. Demolition of distressed properties (there were over 5,700 from 2006-2011) has decreased, but property tax collections continue to be very weak, with a total collection rate of only 87% in 2011. The city is somewhat insulated financially from assessed value declines and poor collections as only a small portion (7.5%) of general fund revenue is derived from property taxes.
MANAGEABLE DEBT PROFILE
The city's overall debt per capita is moderate at $2,376, but debt to full value is above-average at 5.8%. Fitch expects debt levels to remain manageable given above-average amortization with 70% of debt retired in 10 years. The city issues approximately $25 million of bonds annually, which are backed by income taxes. The city is also required to use one-ninth of income tax receipts (restricted income taxes) solely for capital improvements or debt service on obligations issued for capital improvements. In 2011, after payment of debt service, approximately $10.9 million was available for capital projects. Currently the city has no capacity to issue GO debt. Debt service costs for 2011 represented a somewhat high 14.5% of total general and bond retirement expenditures.
The city provides pension benefits through state-administered plans and funds 100% of its annual required contribution. Total carrying costs including debt service, required pension contributions, and OPEB payment requirements on a pay-as-you-go basis are manageable at 19.3% of total government fund expenditures.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com National Association of Realtors and Financial Advisor.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria'(Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria'(Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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