Fitch Affirms Shaker Heights, OH's LTGOs at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'AAA' rating on the city of Shaker Heights, OH's (the city) $17.1 million limited tax general obligation (LTGO) bonds.

In addition, Fitch affirms the implied unlimited tax general obligation (ULTGO) rating at 'AAA.'

The Rating Outlook is Stable.

SECURITY

The bonds are full faith and credit general obligations of the city payable from ad valorem property taxes within the 10-mill limitation imposed by Ohio law.

KEY RATING DRIVERS

STRONG MANAGEMENT AND RESERVES: Prudent financial management has historically resulted in high reserve levels.

WEALTHY COMMUNITY: The city benefits from an affluent local economy reflected in high wealth levels, below-average unemployment and minimal exposure to manufacturing.

AMPLE FINANCIAL FLEXIBILITY: The city prudently responded to the state-wide repeal of the estate tax by increasing its income tax to offset the loss of revenue.

MANAGEABLE DEBT BURDEN: Debt levels are modest to average and future debt needs for capital are minimal.

FINANCIAL FLEXIBILITY SUPPORTS NO RATING DISTINCTION: The city's high level of overall financial flexibility chiefly reflected in strong liquidity and reserves as well as demonstrated voter support for revenue and service initiatives supports the 'AAA' for the implied ULTGO and LTGO rating.

RATING SENSITIVITIES

CHANGES TO CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Shaker Heights is a fully developed and affluent residential suburb located 10 miles southeast of downtown Cleveland.

AFFLUENT CLEVELAND SUBURB

Access to an extensive transportation network, a variety of health, cultural, and educational institutions and reputable public and independent schools help attract and maintain a highly skilled and educated workforce. The city's unemployment rate is 5.3%, well below the Cleveland metropolitan area, the state, and the U.S. Per capita income is a high 177% of the national average, while 65% of residents have bachelor's degrees, well above the national average of 28%.

INCREASE IN INCOME TAX OFFSETS ELIMINATION OF ESTATE TAX

The city has historically benefitted from large payments through a state-run estate tax, including a $2.1 million payment in 2012 (6% of cash basis revenue). Receipts have been as high as $15 million, with large excesses being used to bolster reserves. The state eliminated the estate tax effective Dec. 31, 2012. Due to the lag in the collection of this tax, unaudited 2013 results show $2.8 million of estate tax receipts in 2013, and the city expects a small additional amount in 2014.

In response to the elimination of the estate tax, the city increased its income tax from 1.75% to 2.25% in late 2012. Over 50% of the city's general fund receipts come from its income tax, which generated $22.2 million in 2012. The increase in the income tax should more than make up for the elimination of the estate tax as income tax revenue was up over $6 million in 2013. The income tax is paid by residents and those who work in the city, with residents getting a 0.5% credit for taxes paid if they are employed in other cities. The city's vulnerability to this concentration is mitigated by its strong demographic profile, which should somewhat minimize volatility.

Real estate tax revenue has declined due to reductions in valuations, totaling $6.3 million in 2012. Home prices have been increasing so the city anticipates growth in its assessed valuation when its properties are reassessed in 2015. State funding declined by over 50% from 2011 to 2013, but a small increase is projected for 2014. State funding is under 2% of revenues. In addition to increasing the income tax, the city has also offset these declines through active expense management, including headcount reductions, increased employee health care contributions, and increased shared services with neighboring communities.

ELEVATED FUND BALANCE LEVELS

The city finished 2012 with a $1.1 million operating surplus (after transfers), or 2.7% of expenditures, increasing the unrestricted general fund balance to $19.6 million. This represents a strong 49.2% of expenditures and transfers out. The surplus was a result of close management of expenditures and growth in the income tax from the rate increase late in the year.

Unaudited cash basis results for 2013 show a $2.6 million general fund surplus. The city benefitted from a full year at the higher income tax rate overlapping with a final year of robust estate tax receipts. The surplus is in addition to a $2.7 million increase in transfers out for capital spending.

The cash basis 2014 budget forecasts a $345,000 surplus. The budget includes a flat property tax levy, a 2% increase in income tax revenue, and estate tax receipts declining from $2.8 million to $500,000. Transfers out for capital were reduced to levels more similar to historic trends.

MANAGEABLE DEBT BURDEN

Overall debt levels are average at $1,944 per capita and 2.4% of market value, largely due to considerable overlapping school debt. Amortization is average with 54% of principal repaid within 10 years. Capital needs are minimal and no additional debt issuance is planned by the city or the overlapping school district.

The city contributes to the Ohio Public Employees Retirement System (OPERS) and the Ohio Police and Fire Pension Fund (OP&F) to fund both pension and other post employment benefits (OPEB). Both OPERS and OP&F are cost-sharing, multiple-employer defined benefit pension plans. Carrying costs for debt service, pension and OPEB in 2012 totaled a low 15% of government spending.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's 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.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821154

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Contacts

Fitch Ratings
Primary Analyst
Eric Friedman, +1-212-908-9181
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Eric Friedman, +1-212-908-9181
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com