NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades its rating on the following Lorain County, Ohio (the county) bonds:
--$21.6 million in limited tax general obligation bonds (LTGOs), various series, to 'AA-' from 'AA';
--$790,000 taxable revenue development bonds (Lorain County port authority bond fund), series 2003A, to 'A+' from 'AA-'.
Additionally, Fitch downgrades to 'AA-' from 'AA' its rating on the county's implied unlimited tax general obligation (ULTGO) pledge. The county has no ULTGO bonds.
The Rating Outlook is Stable.
SECURITY
LTGO bonds are secured by the levy of an ad valorem tax on all property within the 10-mill limitation.
Port Authority (the authority) bonds are secured by contract payments from the Lorain County Visitors Bureau (LCVB) equal to debt service payments. Contract payments include a 3% countywide lodging tax assigned by the LCVB to the county. If lodging tax payments are insufficient, the county covenants to budget and appropriate non-tax revenue to pay any shortfall in debt service. A cash-funded debt service reserve fund equals 10% of initial par.
KEY RATING DRIVERS
DOWNGRADE CONSIDERATIONS: Fitch's downgrade reflects reduced financial flexibility, concerns about the county's ability to consistently balance its budget, and signs of potential economic weakening. Further budget adjustments may be challenging given limited revenue-raising capacity and expenditure flexibility.
ECONOMIC WEAKENING: The area economy has an above-average representation in manufacturing and average- to below-average economic indicators. A notable decline in assessed value (AV) for 2013 as well as some local layoffs suggest some stall-out in the local recovery.
LOW DEBT & LONG-TERM LIABILITIES: The county's debt, pension, and OPEB costs do not cause budgetary pressure as carrying costs are low.
LTGO RATING ON PAR WITH IMPLIED ULTGO RATING: The LTGO bonds are rated on par with the implied ULTGO rating due to the still-sound level of financial flexibility as indicated by the county's healthy fund balance.
PORT AUTHORITY RATING: The one-notch differential between the ratings on the GO and Port Authority bonds reflects the latters' narrower pledge of non-tax revenues.
RATING SENSITIVITIES
SHIFTS IN CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, especially in the county's financial and economic performance. Fitch expects that the financial operations will continue to experience volatility but reserves will remain sound.
CREDIT PROFILE
Lorain County is located in northern Ohio, immediately west of the city of Cleveland on Lake Erie. Population has grown 5.9% since 2000, to approximately 301,000 in 2013.
REDUCED FINANCIAL FLEXIBILITY; JAIL WAS DRAIN IN 2012
County financial operations underperformed break-even expectations in 2012, with a large operating deficit of $4 million (8.2% of spending) driven by an unbudgeted $4.6 million operating transfer to the county jail fund. The unrestricted fund balance also decreased notably year-on-year, but stood at a solid 23.3% at the end of 2012.
The county's unrestricted fund balance was overstated in 2011 as advances to other funds were later reclassified as transfers out. If restated, Fitch estimates that 2011 unrestricted fund balance would have been a still-high $20 million (or 46% of spending), but below the reported $25 million.
Management projects a small addition to fund balance in 2013 driven by sales tax, which was up 4.9% from the prior year and over budget. Fitch regards these results with some caution given variability in actual versus projected results in prior years. The year 2013 contained 3% pay raises for the first time in three years, offset by healthcare cost shifts to employees. Contracts call for further 3.5% and 2.25% pay increases in 2014 and 2015, respectively. The year 2013 was the first year that the county received constitutionally mandated state-wide casino revenues, which totaled $3.5 million, underperforming expectations by 12%.
The 2014 budget conservatively contains a decrease in sales tax from 2013 actual. The county appropriated its full fund balance as is its practice, but anticipates using only $2 million in 2014. The county reports that further fiscal balancing tools are narrow, with expenditure reductions limited to capital needs deferral. Voters have demonstrated little appetite for tax increases by overturning the county council-imposed sales tax in 2012 and rejecting an additional sales tax in 2013.
UNEXPECTED AV DECLINES; ABOVE-AVERAGE UNEMPLOYMENT
May 2014 unemployment rate is down from a year ago, to 6.6%, driven by labor force declines, and is now above state (5.3%) and national (6.1%) averages. Local unemployment was below the national average through much of the recession. Manufacturing employment within the MSA remained above average at 136% of the national average in 2013. Local unemployment will likely remain elevated given recently announced layoffs at Teletech and reductions at the Ford plant, the county's biggest employer. However, Fitch believes that some degree of long-term economic stability comes from the several hospitals in the county, which have completed expansions in recent years, as well as Oberlin College.
AV declined an unanticipated 7.3% in 2013. Home prices for 2014 are marginally up over the year prior according to Zillow, suggesting some stability in the local housing market. Wealth indicators are approximately average, though market value per capita is below average at $48,000. Educational attainment is below average, with 20% of residents reporting a bachelor's degree compared with the national average (28%).
LONG-TERM LIABILTY PROFILE A CREDIT POSITIVE
Fitch believes that the very low cost of carry and low-to-moderate debt burden are credit strengths. The debt burden of $1,664 per capita or 2.7% of market value consists primarily of overlapping debt, and debt service as a percent of spending is quite low at 2% of governmental spending in 2012. Amortization is average at 50% in 10 years. The county does not have a formal capital improvement plan due to a reported lack of need. Future capital plans consist primarily of rolling stock replacement and infrastructure maintenance.
The county participates in state plans for pension and OPEB benefits. Aggregate general fund contributions for both benefit classes were at a moderate $12.2 million in 2012 across governmental funds, equal to 6.1% of spending. The largest state retirement fund, OPERS, is somewhat underfunded at an estimated 73% as of Dec. 31, 2013, using a 7% rate of return assumption. Fitch views as positive 2012 pension reforms which will increase incrementally contributions from employees and raise retirement eligibility age.
PORT AUTHORITY BONDS BENEFIT FROM COUNTY-GUARANTEED REVENUE
The 'A+' rating on the port authority bonds reflects the county's commitment of non-tax revenues in an amount sufficient to pay debt service. Non-tax revenues have declined 28% since 2008, largely driven by significant weakening in interest revenue. Maximum annual debt service (MADS) as a percent of total non-tax revenues was still a small 0.7% in 2012. Revenues are diverse and constitute 31.1% of county general fund revenues in 2012, coming from fees, charges for services, fines, interest, and other revenues. There is a cash-funded debt service reserve fund, roughly twice the semiannual debt service payment, which Fitch believes would provide sufficient liquidity should there be delays in county remittances from the short 10-day period between notification by the trustee of any deficiencies and debt service payments.
The bonds are intended to be repaid from a 3% county lodging tax (from which the cities of Lorain and Avon Lake exempt), which flow directly to the trustee from the county monthly for debt service. The lodging tax is part the county's guaranty. The use of non-tax revenues for debt service is only triggered when lodging taxes are insufficient.
Coverage from lodging tax revenue has remained above 3.0x since 2008, dipping 10% in 2009 and having strongly recovered subsequently. Debt service is roughly level and MADS coverage in 2018 using 2009's low-point in revenues is a strong 3.0x. Funds not used for debt service are returned to the county for operations.
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, and Zillow.
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=844414
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