Fitch Affirms Hamilton County, OH $544MM Sales Tax Bonds at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating of the following Hamilton County, Ohio (the county) obligations:

--$544 million outstanding sales tax bonds series 2000B, 2006A and 2011A.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first lien on dedicated half-cent sales tax approved by voters in March 1996. The bonds also benefit from a debt service reserve fund and a sales tax stabilization fund.

KEY RATING DRIVERS

NARROW DEBT SERVICE COVERAGE: Sales tax coverage of maximum annual debt service (MADS) is sufficient for the rating category. Revenue growth over the past five years has been small but consistent.

WEAK LEGAL PROTECTIONS: The additional bonds test is liberal and the debt service reserve is set at less than the usual level.

RATING CEILING: The rating on the sales tax bonds is limited by the county's general credit quality to reflect the potential for a disruption in pledged revenue in the unlikely event of the county's bankruptcy.

SOUND RESERVES DESPITE PRESSSURED FINANCES: Expenditure reductions have allowed the county to rebuild reserves to strong levels. The county has maintained reduced expenditures despite recently increased revenues.

DEEP AND DIVERSE ECONOMY: The county's substantial economy is anchored by the City of Cincinnati and bolstered by several Fortune 500 corporations, the University of Cincinnati and numerous large healthcare institutions. Wealth levels are generally above national averages but population, employment and labor force have declined over the past decade. Current employment rates are trending positive with recent positive employment increases.

IMPROVED AUDIT TIMING: Over the past year the county has completed financial audits for fiscal 2011-2013 with minor audit exceptions. Fitch's rating assumes timely and accurate financial reporting will continue in 2015 and beyond.

MANAGEABLE DEBT: The aggregate debt burden is moderate, pay-out of principal is below average and future debt issuance appears limited.

RATING SENSITIVITIES

BUDGETARY PRESSURES BUT STRONG RESERVES: The rating is sensitive to shifts in fundamental credit characteristics including the county's sound financial management practices and strong reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

Hamilton County, home to Cincinnati, is located on the border of Kentucky and Indiana in southwest Ohio. Population has shown a notable decline of 4.8% since 2000 to an estimated 804,520 in 2013. Declines are expected to moderate.

RECOVERING SALES TAX COLLECTIONS

Sales tax collections rebounded by a total of 17.8% over the past five years, after declining a cumulative total of 8.6% due to the economic downturn. Fitch believes there is merit to management's expectation that sales taxes will trend positively in 2015 and believes that the county has budgeted collections conservatively. Over the longer term, Fitch expects revenue to increase modestly.

NARROW MADS COVERAGE; CURRENT COVERAGE SOLID

Coverage of annual debt service (ADS) is projected to be good at 1.82 times (x) in 2014. However, debt service coverage is likely to decline through the life of the bonds, given the escalating debt service schedule. ADS coverage drops to an adequate 1.33x by 2027, the MADS year, assuming no sales tax growth. A 23.5% decline in revenues would result in 1x MADS coverage. Based on the low 1.1% average annual growth over the past eight years, Fitch expects coverage to remain consistent with the current rating category.

WEAK LEGAL STRUCTURE

The pledged half-cent sales tax was implemented for the purpose of providing for stadium and riverfront related expenditures and property tax relief for the county. The Ohio State Department of Taxation administers, collects and distributes county sales taxes within the state. The half-cent sales tax is distributed by the State of Ohio at the irrevocable direction of the County to the Trustee to satisfy the bond fund requirements set forth in the Indenture. Any excess revenue is then transferred by the Trustee to the county to be used at the county's discretion. Pursuant to statutory provisions, the county may not repeal the half-cent sales tax until all bonds secured by half-cent sales tax are retired.

Additional leveraging requires that the aggregate proceeds of the greatest 12 consecutive months in the 18-month period preceding debt issuance must cover MADS on outstanding parity bonds by at least 1.15x, which Fitch categorizes as weak. Issuance of additional parity bonds must also be in accordance with the state statute, which requires that MADS cannot exceed the average of the prior two years of sales tax collections.

Bondholders receive additional protection from a sales tax stabilization fund and a debt service reserve fund. The indenture mandates maintaining the sales tax stabilization fund at a minimum of 10% of the highest year's sales tax collections. While the county has discretion over the use of these funds, debt service payments have priority over any use. The current value of the stabilization fund is $6.96 million.

The debt service reserve fund is set at one-half the lesser of MADS or 125% of average annual debt service, below usual levels. In conformance with the indenture requirements, the county has begun cash funding the reserve in lieu of the original surety bonds. In 2011, the county contributed $9.5 million of cash. An annually renewable credit support instrument recently added $9.9 million and provides for expansion in future years.

DIVERSE REGIONAL ECONOMY; POPULATION AND EMPLOYMENT WEAKNESS

The county's economy continues to benefit from the stability of a diverse mix of large employers. Several Fortune 500 corporations, as well as the University of Cincinnati and Cincinnati's Children's Hospital, make the county a regional center for healthcare and higher education employment. Positive economic developments include the construction and opening of a $400 million casino within Cincinnati's expanding downtown and the opening of a revamped business center by Procter & Gamble Co. Combined, the projects are expected to lead to nearly 3,000 new employment opportunities over the next three years.

The county's 4.8% September 2014 unemployment rate has recovered strongly over the past three years and is now below the state (5.0%) and nation (5.7%). Income indicators are somewhat mixed, ranging from a bit below to somewhat above national levels and at or above regional indices.

BUDGETARY PRESSURES REMAIN

The county's financial position has improved following sizeable operating deficits in fiscals 2006-2008, although it remains challenging due to stagnant revenues. Expenditure reductions allowed management to record general fund surpluses in four of the last five years, increasing 2013 fund balance to $70 million, equal to a very strong 35% of spending.

Mid-year budget 2014 projections indicate revenues are above expenditures by approximately $1.6 million. Projected results on a budgetary basis show a general fund reserve of $28 million or 14% of ongoing expenses. GAAP-based balances are projected to be similar to those in fiscal 2013.

The county's $201.8 million 2015 budget assumes flat overall revenues. Beginning in April 2015 the county sales tax rate will increase by 0.25% or about $37 million annually to fund specific renovation project. Budgeted expenses are $4.8 million (2.3%) below prior year projections largely by balancing departments priorities, continued flat staffing levels and no salary increases (except as required by bargaining units). Fitch will monitor the county's ability to maintain recurring budgetary balance with strong general fund reserves.

QUALIFIED AND DELAYED AUDITS

Audited financial statements for fiscals 2004-2006 were delayed pending resolution of reviews by the State Auditor and the Ohio Department of Job and Family Services (ODJFS) regarding accounting and management practices of the county's social service programs (HCJFS) for the periods of July 1, 2000 through June 30, 2004. ODJFS released a Limited Review Report in May 2008 with preliminary quantification of findings. The programs in question are funded by federal funds and the U.S. Department of Health and Human Services (HHS). HHS notified ODJFS that $59 million of expenditures were not properly expended during the period in question, although no allegations of fraud or criminal activity were ever raised. The two parties are negotiating to determine ODJFS's final liability, expected in 2015 and not expected to be a material amount.

MODERATE DEBT AND PENSION BURDEN

Overall debt is moderate at $2,412 per capita and 3.4% of market value. Amortization is somewhat below average at 47.1% of principal retired within 10 years. The county has modest plans for additional debt issuance in 2015 which are not expected to alter debt ratios.

County employees participate in the Ohio Public Employee Retirement System (OPERS), the State Teachers Retirement System of Ohio (STRS Ohio) (very few employees remaining) and the City of Cincinnati retirement system (CRS) (mostly metropolitan sewer district employees). OPERS and STRS Ohio each administer three separate plans, including a cost-sharing, multiple-employer (CSME) defined benefit plan and a defined contribution plan. All plans also provide other post-employment benefits (OPEB) for eligible employees. OPEB costs are paid on a pay-go basis.

For fiscal 2013, the county contributed $35.8 million in total pension costs and $3 million in OPEB. Carrying costs for GO and sales tax debt service, pensions and OPEB as a percentage of total governmental funds were moderate at 13.7%. Approximately $1.1 billion of enterprise debt is outstanding for the metropolitan sewer district and other small enterprises. The funds are currently self-supporting largely by user charges.

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, and the National Association of Realtors.

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

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=959115

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Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer
Director
+1 212-908-9167
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Wagner
Director
+1 212-908-9167
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer
Director
+1 212-908-9167
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Wagner
Director
+1 212-908-9167
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com