Fitch Affirms Cuyahoga County, OH's LTGOs at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Cuyahoga County, OH (the county) ratings:

--Approximately $199 million limited tax general obligation (LTGO) bonds, series 2012A, series 2012B, series 2009A, series 2009B, series 2005 (refunding and sewer), series 2004, and series 2000.

--The Rating Outlook is Stable.

SECURITY

The bonds are unvoted LTGO payable from ad valorem taxes levied on all taxable property within the 10-mill limitation imposed by Ohio law.

KEY RATING DRIVERS

DIVERSE/STABLE ECONOMIC PROFILE: The county's economy is broad with a solid foothold in health care and higher education, providing stability and growth potential. Continued strong economic development has resulted in positive employment and labor force growth and lower unemployment rates.

BELOW AVERAGE SOCIOECONOMIC INDICATORS: The county's below average socioeconomic profile is characterised by a declining population, unemployment rates, although improving, still above state and national averages, below average income levels, and an elevated poverty rate.

WELL-MANAGED, HEALTHY FINANCES: Reliance on economically sensitive sales tax revenue is mitigated by the county's prudent financial practices which have resulted in substantial reserve levels and ample financial flexibility.

MANAGEABLE LONG-TERM LIABILITIES: The county's debt ratios are moderate and carrying costs are low. Levels should remain stable as amortization is average and there are no significant borrowing plans.

CREDIT PROFILE

The county is located on the southern shore of Lake Erie in northeastern Ohio. The city of Cleveland ('A+'; Stable Outlook) is the county seat. County population has steadily declined (8.2% from 2000 to 2010) due to out-migration and job losses in manufacturing. Declines have moderated recently with population decreasing approximately 1.3% from 2010 to 2013.

DIVERSE ECONOMY BENEFITS FROM HEALTHCARE AND HIGHER EDUCATION

Cuyahoga County has successfully diversified its economy away from manufacturing and continues to benefit from the stability of the healthcare and higher education sectors. Universities within the Cleveland metropolitan area include Case Western Reserve University, Cleveland State University, John Carroll University and Kent State University. Additionally, there are 18 hospitals located in the county, employing approximately 52,396 full-time equivalent employees. Major county employers include the Cleveland Clinic (30,600 employees), University Hospital Health System (13,334), U.S. Office of Personnel Management (12,035) and Progressive Corporation (7,858).

Economic development is a key focus of county management. The new $465 million convention center/medical mart (renamed the Global Center for Health and Innovation; the 'Center'), located in Cleveland, opened in July 2013, enhancing the county's healthcare sector. The Center hosted 113 events in 2013, 152 events to date in 2014 and will host the 2016 Republican convention. An adjacent 600-room Hilton hotel is currently being constructed and is set to open in the summer of 2016. Additionally, the first phase (office/residential) of the $272 million Flats East Bank mixed use project located in an industrial area of Cleveland along the Cuyahoga River has opened and is 92% occupied. The second phase (residential/retail/entertainment) will be completed in 2015.

BELOW-AVERAGE SOCIO-ECONOMIC PROFILE

In addition to a declining population, the county's unemployment rate measured at 7% in August 2014 was above state and national rates of 5.3% and 6.3%, respectively, but an improvement from the 7.8% recorded in August 2013. Fitch believes that economic development efforts are beginning to pay off as evidenced by improving employment indicators. Employment and labor force growth from August 2013 to August 2014 was strong, growing by 2.3% and 1.3%, respectively - much stronger than both state and U.S. trends.

County income levels remain below U.S. averages at 97% of per capita money income and 83% of median household income. The 2012 poverty rate of 17.7% was elevated and above state and national levels of 15.4% and 14.9%, respectively.

WELL MANAGED, HEALTHY FINANCIAL POSITION

The county's consistent strong reserve position is a mitigant to its dependence on economically sensitive sales tax receipts which represent approximately 60% of general fund revenues. Sales tax growth has been strong increasing by 4.9% in 2012 and 4.6% in 2013. The county increased sales tax by 1/4% in October 2007 to provide sufficient additional monies to the general fund to allow the county to utilize certain non-tax revenues, in addition to other available revenues, to finance the construction of the Center. Since 2008, funds have been accumulating in the general fund from the sales tax increase and started to be drawn in 2010 when construction was started on the Center and will continue to be used to fund the construction of the adjacent Hilton hotel.

Property taxes comprise a small 4% of general fund revenues. Some of the county's operations (Health & and Human Services, Developmental Disabilities) are funded via voted tax levies accounted for in special revenue funds, all of which appear healthy. The restrictive taxing environment common to Ohio municipalities is somewhat offset by the county's solid voter support for additional and renewal tax levies above the 10-mill 'inside' limitation. In November 2013, two-thirds of voters approved the four-year renewal and increase from 2.9 mills to 3.9 mills of a health and human services levy.

Due to a sexennial appraisal in 2012, assessed valuation declined 7.2% in 2013. Fitch expects that new projects coming on line will somewhat offset further declines (assessed value grew less than 1% in 2014). The property tax base is diverse with the top 10 taxpayers comprising 3.43% of assessed valuation. Current collections are weak at 92% but stronger at 96% on a total basis.

Financial operations are well maintained, preserving ample reserves which provide financial flexibility. Positively, management has been proactive in reducing expenses via consolidated and streamlined operations, union concessions, an early retirement incentive plan, furlough days, layoffs and attrition. On an audited GAAP basis, for the year-end Dec. 1, 2013, the unrestricted general fund balance totaled $242.4 million, or a strong 66.2% of general fund spending. This is comparable to the 65.2% and 59.1% reported at year-end 2011 and 2012, respectively.

The county's general fund biennium budget (2014 and 2015) totals $377.2 million for 2014. The 2014 budget forecasts a sales tax increase of 3% which Fitch considers reasonable given past performance. At the end of third quarter 2014, sales tax revenues were up 3% over the same time period in 2013. Year-to-date results are positive with general fund revenues approximately $9 million over budget due primarily to two one-off transactions; expenditures are on target. On a budgetary basis, the general fund balance at the end of 2014 is projected at $183 million, or 35% of expenditures, well within the county's 25% policy. The 2015, $381.5 million budget is projecting a slight deficit with an ending fund balance of $152 million and maintenance of the reserve policy. Management will address the deficit during an upcoming budget update process. Fitch considers the county's history of consistently maintaining high reserve levels a key credit strength and expects the county to continue to maintain strong general fund reserves in excess of their policy.

MANAGEABLE LONG-TERM LIABILITIES

The county's debt profile is moderate at $2,610 per capita and 4.2% of market value. Fitch expects debt levels to remain fairly stable as amortization is average and debt issuance is not significant.

As a result of declines in assessed valuation, the county is precluded from issuing additional unvoted GO debt but does have flexibility to issue sales tax revenue bonds as unvoted funding. The county is planning on issuing $153 million in bonds, payable from sales tax revenues, in November.

The county participates and continues to make 100% of its annual required contributions to the Ohio Public Employees Retirement System to fund both pension and other post-employment benefits (OPEB). As of Dec. 31, 2013, the plan reported an 80.9% funded ratio. Using Fitch's more conservative 7% rate of return, the estimated funded ratio is 73%. Carrying costs for debt service, pension and OPEB is manageable at 14% of government fund expenditures.

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

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 and, National Association of Realtors.

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=913354

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Contacts

Fitch Ratings
Primary Analyst
Karen Wagner, +1-212-908-0230
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Wagner, +1-212-908-0230
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com