NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following city of Brook Park, Ohio (the city) bonds:
-- $7.2 million limited tax general obligation (LTGO) various purpose improvement bonds, series 2004, 2011 and 2013;
-- Implied unlimited tax GO bonds.
The Rating Outlook is Stable.
SECURITY
The city has pledged its full faith and credit and its ad valorem tax subject to a 10-mill limitation.
KEY RATING DRIVERS
WEAK LOCAL ECONOMY: Despite recent signs of stability, the local economy remains weak as reflected by long-run population and employment losses. Assessed valuation declines will take a long time to recover despite modest new economic development.
ECONOMIC CONCENTRATION: Brook Park's employment base and revenues are concentrated in Ford Motor Company and NASA and its contractors. While the city benefits from local investment by Ford over the past two years, dependence on an economically sensitive employer will continue to be a vulnerability.
FINANCIAL & DEBT FLEXIBILITY MITIGATE SOME RISKS: The risks of dependence on concentrated and economically sensitive income taxes are partially offset by the city's adequate financial flexibility, featuring solid fund balance levels and pay-go funding of capital needs, as well as the city's favorable debt position.
LOW LONG-TERM LIABILITIES: The city's long-term liability profile is a credit positive, with very low debt, resources dedicated to pay-go and debt retirement, limited capital plans, and manageable pension and OPEB costs through the city's participation in the state's cost-sharing multiple-employer plans.
LTGO ON PAR WITH ULTGO RATING: Fitch makes no distinction between the implied unlimited tax GO and LTGO ratings on the basis of the city's sound financial flexibility.
RATING SENSITIVITIES
REDUCTION IN FINANCIAL FLEXIBILITY: Deterioration in the city's financial profile could put downward pressure on the rating.
ECONOMIC INSTABILITY: Unexpected deterioration in local economic indicators could cause negative rating action.
CREDIT PROFILE
Brook Park is a mature suburban community located in Cuyahoga County (LTGOs rated 'AA+', Outlook Stable by Fitch), approximately 10 miles southwest of downtown Cleveland (LTGO rated 'A+', Outlook Positive). Population has declined 10% since 2000, to an estimated 18,986 in 2013. Fitch expects slow declines to continue, consistent with management's expectation.
CONCENTRATED ECONOMY & REVENUE REPRESENTS KEY RISK
A key credit risk for the city is the concentration of its revenue base and economy in Ford Motor Company (Ford; IDR rated 'BBB-', Outlook Positive) and NASA. Ford operations in Brook Park expanded when manufacture of the EcoBoost engine commenced in 2014. Ford added approximately 450 jobs and the $200 million facility has been running at capacity in 2015. The new plant brings total Ford employment in the city to approximately 1,350. This investment is largely personal property and will not benefit the city's tax base though the new jobs should modestly augment the city's income tax base. NASA employment is up 13% since 2009 to approximately 1,700, with recent consolidations of departments into the city.
The city's sexennial revaluation effective for 2013 resulted in an 11% drop in assessed valuation (28.5% since 2006 peak) and an increase in concentration in the city's property tax base. Valuations were flat in 2014 and are expected to be flat over the near term as there are no significant appeals pending and modest new economic development is heavily abated. Top-10 taxpayers represent a moderately concentrated 13% of taxable value in 2014.
City employment has been essentially flat over the past six years following significant total declines of 7.2% in 2007 and 2008. A 1% increase in employment for 2014 coupled with a stable laborforce resulted in a decline in city unemployment rates to 6.1% for 2014 which remains above state and national averages but down from the peak of 9.9% in 2009. The city's wealth levels in 2014 are on par with state levels and below national levels.
COST CONTAINMENT HAS BEEN KEY TO STABILIZING FINANCES
Management has taken prudent steps to reduce its expenditure base, by consolidating positions and making investments for efficiencies. Headcount is down by approximately 53 from over 200 in 2006, a 25% decline. In 2013 and 2014, the city paid early retirement incentives for 21 employees. Management estimates $1 million in net savings from these retirements in 2014, increasing to $1.5 million annually thereafter. Tight expenditure controls persist in 2015 which management projects will result in a general fund surplus.
PAYGO HELPS INSULATE CITY FINANCES FROM INCOME TAX CONCENTRATION
The city's personal income tax revenues were a very high 72% of general fund sources in 2014. Management reports that 2015 gross receipts are performing slightly ahead of the prior year. Income tax revenues are concentrated in Ford and NASA workers, together representing approximately $6.2 million. For 2015, this equates to 33% of projected gross income tax revenues and approximately 28% of total general fund revenues. Concentration, although still high, is down significantly from 65% of income tax revenues prior to the recession due to Ford's retraction (40% reduction in staffing since 2007 prior to the recent additions).
The city prudently dedicates a portion of income tax receipts to capital projects, currently 20%. While the exact mix of income tax for pay-go varies by year and is subject to council approval, this ongoing spending benefits financial flexibility and helps to insulate operations from risks associated with a highly concentrated revenue base. Given the city's low direct debt levels, Fitch believes that the city has ample flexibility to adjust its pay-go spending to augment resources for current year operations.
IMPROVING OPERATING BALANCE
The city has taken strong actions over the past two years to bring expenditures in line with reduced revenues. City financial performance had been strained as spending was not reduced in line with property and income tax declines. General fund financial performance from 2011-2013 was modestly negative following transfers out for pay-go funding, with the city posting fund balance (GAAP basis) draws of $2.3 million in total (3.5% of total spending). As a result of cost cutting measures, fiscal 2014 resulted in a more modest draw of $92,000 (0.4% of spending), net of a $1 million transfer out for pay-go, with unreserved fund balance totaling an adequate $5.1 million or 24% of budget. Based on conservative budgeting, slightly higher than expected income taxes and tight expenditure control, the city is projecting surplus results for 2015 (cash-basis) of over $250,000 which will increase fund balance. Management has successfully brought the general fund budget into balance using mostly expenditure reductions as revenue-raising is limited given tax rate caps absent voter approval. Economic development activity may stabilize revenues in the near term.
LONG-TERM LIABILITY PROFILE A CREDIT STRENGTH
The city's credit profile benefits from very low debt and manageable long-term liabilities. Overall debt is just $880 per capita and 1.4% of market value. Pay-out is rapid with 65% of principal retired in 10 years. Management reports that capital needs are limited and does not anticipate debt issuances in the coming five years.
The city provides pension and other post-employment benefits (OPEB) benefits through state-run cost-sharing plans as well as a single-employer OPEB plan. The city makes 100% of its annual required contribution (ARC) to the state-run plans, and has funded at least the actuarially-based ARC for its own OPEB liability for the past four years.
The largest state retirement fund, OPERS, reported an 84% funded ratio as of Dec. 31, 2014, or an estimated 76%, 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. Further, the city has realized reductions in its fixed costs driven by headcount reductions.
The city's cost of carry of debt service, pension, and OPEB was a moderate 11% of governmental fund spending, which Fitch expects to remain stable given continued annual pay-go funding for capital and stable pension and OPEB costs.
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 National Association of Realtors.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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