NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on Westlake, OH's (the city) bonds:
--Approximately $13 million limited tax general obligation (LTGO) bonds affirmed at 'AAA';
--Implied unlimited tax general obligation (ULTGO) affirmed at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The LTGO bonds are secured by the levy of ad valorem taxes limited by rate to the 8.7 mills granted by the city's charter.
KEY RATING DRIVERS
WELL-MANAGED FINANCIAL OPERATIONS: The city has a history of strong solid management which has produced strong reserve and liquidity levels and ample financial flexibility.
RELIANCE ON INCOME TAXES: The city is reliant on economically sensitive income tax revenues which have reported strong growth over the last several years.
HEALTHY PROPERTY TAX BASE: The wealthy tax base is diverse. The residential property tax rate, which is among the lowest of nine surrounding communities, is comprised primarily of continuous levies which mitigate renewal risk.
AFFLUENT WELL-LOCATED COMMUNITY: The city benefits from its close proximity to Cleveland and exhibits strong economic indicators including above-average resident wealth levels, strong full value per capita, and below-average unemployment.
WEAKENED DEBT PROFILE: Debt ratios have increased to above-average levels for the rating category with the recent issuance of the series 2014 non-tax revenue bonds to finance the cost of public improvements in connection with the corporate headquarters of American Greetings (AG) and adjacent development. Fitch believes the increased debt is manageable given the city's modest future borrowing plans and strong financial operations.
IMPLIED ULTGO RATED ON PAR: Fitch makes no rating distinction at this time between the LTGO rating and the implied ULTGO rating in light of the financial flexibility offered by the city's high reserve levels.
RATING SENSITIVITIES
CONTINGENT LIABILITY: The city could face general fund pressure if there is a material increase in future debt more than currently projected.
STRONG FISCAL MANAGEMENT: Maintenance of the strong fiscal management and budgeting practices underscore the city's solid financial profile. Fitch expects management will continue prudent financial practices to maintain its strong reserve levels.
CREDIT PROFILE
The city is situated in Cuyahoga County in northeastern Ohio, approximately 13 miles west of Cleveland, 15 minutes from the airport, and in close proximity to three interstates, making it a desirable location for businesses.
WELL-MANAGED FINANCIAL OPERATIONS PRODUCE STRONG RESERVES
General fund revenues are fairly diverse with income taxes the primary source at 47% followed by property taxes at approximately 31%. Income tax revenue growth has been strong, increasing by 21% from 2009 to 2012. The city levies a 1.5% income tax. Of the 1.5%, one percent is unvoted and used for general operations; 3/8th of one percent is voted through 2023 and dedicated to the infrastructure capital projects fund; and 1/8th of one percent is voted and dedicated to operations and maintenance of the recreation program and center. This levy will expire in 2020, the last year for debt service on recreation bonds issued in 2008. If residents work in a locality that has a municipal income tax, the city provides a 100% tax credit. The city has some flexibility to increase revenues through higher fees and reduction in the 100% income tax credit.
Despite a slight contraction from the recession, the city's property tax base remains solid, generating an above-average full value per capita of $120,000. The tax base is diverse with the top 10 property taxpayers comprising 9.5% of assessed value and total property tax collections are healthy averaging 98%.
The city's property tax rate is relatively low - in 2012 Westlake had the 15th lowest residential and 8th lowest commercial property tax rate out of 80 districts within Cuyahoga County. The property tax rate consists primarily of continuous levies, which Fitch views positively as there is no renewal risk. The one levy that requires renewal, the 0.90 mill supplement for police and fire, was renewed for five years in November 2011. Fitch notes that the city is at its charter tax limit and would need a voter referendum to increase property tax revenues, but takes comfort in the fact that the city has a strong history of voter support for new and renewal levies.
Financial operations are well maintained, preserving ample reserves which provide comfortable margins for liquidity. The city has traditionally maintained large balances in its general fund, well in excess of the policy minimum of 3 months of operating expenses. For year-end Dec. 31, 2012, the city recorded a general fund operating surplus of $3.3 million after transfers. The unrestricted general fund balance held the equivalent of a very strong 139% of general fund spending. On an unaudited cash basis, year-end results for 2013 continue positive trends with a projected ending general fund balance of $35.8 million or 128% of general fund expenditures. Keeping with conservative budget and historical practices, the 2014 general fund budget projects an $11 million use of fund balance.
POTENTIAL FUTURE FINANCIAL PRESSURE
Non-tax revenues are currently used for operations. The city expects debt service on the series 2014 bonds to be paid by TIF revenues and not non-tax revenues. In a worst case scenario, if the city was called upon to pay debt service, based on a conservative pro forma basis using audited 2012 results, general fund reserves would be tapped and reduced over a five-year period without any other budgetary action, but still remain at a healthy level. Fitch would expect management to cut expenditures and/or increase revenues to accommodate the additional debt service costs and preserve financial flexibility and adequate reserve levels.
STRONG ECONOMIC CHARACTERISTICS
With a modest 2010 population of 32,729, an increase of 3.2% from 2000, Westlake is home to an affluent population, featuring per capita income and median household income equal to 166% and 150%, respectively, of the state average. The city is home to world and national headquarters including Nordstrom, Travel Centers of America, Koyo Corporation and Bonnie Bell. City unemployment rates have historically been well below state and national rates. For November 2013, the city reported an unemployment rate of 6.0%, compared to state and U.S. rates of 7.1% and 6.6%, respectively. Major employers include St. John Medical Center (1,383 employees), Hyland Software (1,195) and Westlake City Schools (559).
AMERICAN GREETINGS TO BUILD NEW HEADQUARTERS IN WESTLAKE
American Greetings (AG; not rated by Fitch) will move its corporate headquarters 12 miles from its current Brooklyn, Ohio location to Crocker Park in Westlake. AG will acquire approximately 14.5 acres from the developer and construct the AG headquarters and certain retail space on the AG land.
Westlake faced stiff competition for the new AG headquarters from other municipalities. The AG relocation and expansion of Crocker Park will benefit from a series of city and state incentives. The city has agreed to provide infrastructure improvements, mainly roads and parking garages that will be required to support the AG headquarters and additional retail.
DEBT PROFILE WEAKENS
Debt ratios have historically been moderate with the city issuing little debt. The city's capital improvement projects are funded on a pay-go basis from dedicated income tax levies in the infrastructure capital improvements and recreation funds.
The city's debt profile is weaker with the issuance of the series 2014 bonds. Overall debt per capita increases to $6,464 from $4,622 and debt-to-full value is 5.4%, up from 3.9%, both considered above average by Fitch. Current rapid debt amortization will slow significantly to a below-average 35% in 10 years due to the 30-year maturity of the new bonds. Carrying costs for debt service, pension and OPEB increases from 12.9% of 2012 expenditures to a still moderate 16.4%. Minimal future debt issuance and strong financial operations somewhat mitigate Fitch's concern over the higher debt levels.
LONG-TERM LIABILITIES
The city provides pension benefits through state administered plans and funds 100% of its required contributions. The largest state retirement fund, OPERS, reported a 77.4% funded ratio as of Dec. 31, 2012, and is somewhat underfunded at an estimated 70%, using Fitch's more conservative 7% rate of return assumption. Recent state-mandated changes in employee contributions to OPERS should help improve the system's funded ratios.
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 and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria,' dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated 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=824811
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.