NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on the following Cleveland, OH bonds:
--$29,270,000, series 2007A;
--$1,570,000, series 2007B;
--$20,155,000, series 2007C;
--$8,410,000, series 2008A;
--$37,890,000, series 2009A.
In addition, Fitch has affirmed the city of Cleveland's Issuer Default Rating (IDR) at 'A+'.
The Rating Outlook has been revised to Stable from Positive.
The bonds are unvoted general obligations of the city payable by ad valorem property taxes within the 10-mill property tax limitation and municipal income taxes pledged under the city's general bond ordinance. The city may also use any available funds (state disbursements, interest earnings, all nontax revenues) for debt service.
KEY RATING DRIVERS
The city's 'A+' IDR reflects a below-average revenue framework that is offset by solid expenditure controls, a moderate long-term liability burden, and strong gap-closing capacity. Fitch believes that the city's financial operations would be more challenged in a downturn than is the case for higher rating levels, but expects the city to maintain some reserves throughout an economic cycle and recover financial flexibility as conditions improve. The revision to the Stable Rating Outlook from Positive reflects implementation of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. Under the revised criteria, Fitch expects that the city will maintain strong gap-closing capacity in an economic downturn, although financial operations may be challenged.
Economic Resource Base
The city is located in northeastern Ohio on the southern shore of Lake Erie and is the county seat of Cuyahoga County ('AA+' IDR/Outlook Stable). The city's population declined a significant 17% from 2000 to 2010, but the decline has slowed, with an estimated 2015 population of 388,072, 2% down from 2010.
Revenue Framework: 'bbb' factor assessment
Fitch expects the city's revenue growth to be stagnant, remaining at a rate below the rate of inflation. The city has no independent legal ability to raise revenue.
Expenditure Framework: 'a' factor assessment
The city's expenditures are likely to grow at a rate above natural revenue growth, due to the low expectations for revenue prospects. Flexibility is supported by moderate costs for servicing debt and other long-term liabilities.
Long-Term Liability Burden: 'aa' factor assessment
Cleveland's long-term liability burden including pension liabilities and overall debt is moderate relative to personal income.
Operating Performance: 'a' factor assessment
The city has strong gap closing capacity, balancing its lack of control over revenues with solid reserve levels and expenditure controls.
Maintenance of Reserves: The 'A+' IDR and GO rating is sensitive to any material change in Fitch's expectations for available reserve levels that would affect the city's ability to maintain flexibility in an economic downturn.
The city's economy has transformed from manufacturing to the more stable health and education sectors. The city's weak socioeconomic profile is characterized by a declining population, below average income levels, and high poverty rate. Unemployment rates are consistently above state and national levels. As one of Ohio's largest metropolitan areas, Cleveland benefits from a measure of scale and diversity. The Cleveland Clinic is the largest private employer. Other large employers include University Hospitals of Cleveland, MetroHealth System, KeyCorp, and Case Western Reserve University.
Assessed valuation declined a moderate 5.2% from 2009 to 2013 but has recorded small increases in subsequent years. Fitch expects assessed value to remain stable to modestly increasing given ongoing commercial development and some moderation from high foreclosures. Demolition of distressed properties has decreased, but property tax collections continue to be very weak, with a total collection rate of only 89% in 2015. The city's financial operations are somewhat insulated from assessed value declines and poor collections as only a small portion of general fund revenue is derived from property taxes, but they are an indication of economic weakness.
The city's revenue comes largely from income taxes, which made up 63% of FY 2015 general fund revenue. The remainder is comprised of charges for services, other miscellaneous revenue, and a comparatively small amount of property taxes (7%).
Prospects for natural revenue growth are weak. Fitch believes that future revenue growth is likely to be in line with historical revenue growth, lagging both CPI and GDP. The city projects income tax revenue to grow at 2% and for property taxes to grow at less than 2% annually.
The city is limited in its ability to legally raise revenue independently. The city charter provides that the maximum total tax rate that may be levied without a vote for current operating expenses is 8.35 mills. The city is currently at that limit. The city has no voted property tax levies and none are contemplated as income tax revenues are sufficient to support operations. Increases in the income tax require voter approval. The city is planning to have a ballot initiative in November that proposes increasing the income tax rate from 2% to 2.5%, which would bring in an additional $83 million in revenue.
The city's largest expenditure item is public safety at 64% of FY 2015 general fund expenditures. The city also spent 16% on general government administration and 14% on public works expenditures.
Fitch expects that the city's natural pace of expenditure growth will be above the expected revenue growth rate. The largest drivers in the city's expenditure items include costs related to the labor force, which represents approximately 80% of city expenditures. These expenditures are expected to increase at a rate exceeding 2% annually. Additionally, the city is operating under a consent decree resulting from an investigation by the U.S. Department of Justice. The consent decree largely calls for changes in training of police recruits and experienced police officers and an independent monitor.
The city maintains a solid degree of expenditure flexibility. Carrying costs for debt service and retiree benefits are moderate at approximately 18% of governmental expenditures in FY 2015, and the city management has a solid degree of control over staffing levels and implementing workforce reductions.
Long-Term Liability Burden
The city's long-term liability burden is moderate, with debt and pension liabilities at 17% of personal income. Direct debt totals about $755 million, and overlapping debt about $182 million. Approximately 52% of the total $2.0 billion liability burden is in the form of unfunded pension liabilities, a more variable liability. The city is required to use one-ninth of income tax receipts (restricted income taxes) solely for capital improvements or debt service on obligations issued for capital improvements.
The city participates in the Ohio Public Employees Retirement System (OPERS), which is a cost-sharing, multiple employer defined benefit pension system, as well as the Ohio Police & Fire Pension Fund (OP&F), a cost-sharing multiple employer system. Fitch calculates the ratio of assets to liabilities to be 71% assuming a 7% discount rate.
The city has maintained a strong level of available fund balance throughout the recession and subsequent recovery relative to potential revenue declines depicted by the Fitch Analytical Sensitivity Tool (FAST) in a moderate economic downturn. Fitch expects that available general fund and other operating fund reserves (16% of expenditures in fiscal 2015) would remain above the 'a' reserve safety margin level, even in an unaddressed moderate recessionary period, although the city would be required to use its expenditure flexibility to remain above its 5% reserve policy in times of economic stress.
The city has made efforts to maintain a solid level of available reserves in the recent economic recovery. The city had surpluses from FY 2010 through FY 2014 before a deficit in FY 2015 due to retroactive pay to several of its collective bargaining units. The city expects another draw on reserves in FY 2016 due to another retroactive payment, after which the city is expected to have between $70 million and $74 million in available reserves (approximately 15% of general fund expenditures).
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.