Fitch Affirms Cuyahoga County, OH's General Obligation Bonds and IDR at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA+' rating on the following Cuyahoga County, OH bonds:

-- $33,985,000, series 2005;

-- $20,155,000, series 2009A;

-- $86,195,000, series 2009B;

-- $92,670,000, series 2012A;

-- $8,495,000, series 2012B.

In addition, Fitch has affirmed the Cuyahoga County, OH Issuer Default Rating (IDR) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are unvoted long-term general obligations (LTGOs) payable from ad valorem taxes levied on all taxable property within the 10-mill limitation imposed by Ohio law.

KEY RATING DRIVERS

The 'AA+' rating reflects the county's low long-term liability position and solid revenue and expenditure controls. The rating also reflects Fitch's assessment that the county is very well positioned to address cyclical downturns while maintaining a high level of fundamental financial flexibility.

Economic Resource Base

The county is located on the southern shore of Lake Erie in northeastern Ohio. The city of Cleveland is the county seat. County population has steadily declined (8% from 2000 to 2010) due to outmigration and job losses in manufacturing. Declines have continued but moderated recently with population decreasing approximately 2% from 2010 to 2015. The 2015 population is estimated at about 1.2 million.

Revenue Framework: 'a' factor assessment

Fitch expects the county's revenue growth to be slow, in line with the rate of inflation. The county has substantial independent revenue-raising flexibility.

Expenditure Framework: 'aa' factor assessment

The county's natural pace of expenditure growth should be marginally above the pace of revenue growth, requiring ongoing budget management. Flexibility is strong, supported by moderate costs for servicing debt and other long-term liabilities.

Long-Term Liability Burden: 'aaa' factor assessment

The county has a low long-term liability burden including pension liabilities and overall debt relative to personal income.

Operating Performance: 'aaa' factor assessment

Cuyahoga County has exceptionally strong gap-closing capacity, with available reserves well positioned to remain above the 'aaa' reserve safety margin level throughout a downturn following strong budget management during the current recovery.

RATING SENSITIVITIES

Revenue Growth Expectations: The 'AA+' IDR is sensitive to revenue growth continuing to be in line with Fitch's expectations approximating inflation.

CREDIT PROFILE

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. There is also a significant hospital presence. Major county employers include the Cleveland Clinic, University Hospital Health System, U.S. Office of Personnel Management, and Progressive Corporation.

The county's below-average socioeconomic profile is characterized by a declining population; below-average household income levels, and an elevated poverty rate. In addition to a declining population, the county's unemployment rate has risen to above state and national rates. Fitch believes that economic development efforts are beginning to show some benefit, as evidenced by modestly improving employment indicators.

Revenue Framework

The majority of the district's revenue comes from sales taxes, which made up 62% of FY 2015 general fund revenue. The remainder is largely comprised of charges for services, intergovernmental revenue, and a small amount of property taxes (about 3% of the total).

Fitch expects natural revenue growth to be slow, in line with historical revenue growth and approximating CPI. The county has projected sales tax revenue to grow at 2%, lower than the 4% to 5% growth actually seen to date in the current fiscal year.

The county has a substantial legal ability to raise revenue independently. Under state law, the county council has the authority to adopt resolutions increasing the sales and use tax by 0.25%, up to an aggregate maximum of 1.50% to provide revenue for the general fund and for certain other purposes. The county cannot increase property tax rates without approaching voters to approve a new levy.

Expenditure Framework

The county's largest general fund expenditure item is judicial programs at 75% of FY 2015 general fund expenditures. This includes the county sheriff department, regional jail, court clerks, public safety, and the medical examiner office. The county also spent 20% on legislative and executive administration in fiscal 2015.

Fitch expects that the county's natural pace of expenditure growth will be marginally above the expected revenue growth rate. The largest drivers in the county's expenditure items are costs related to the labor force, with the majority of its 36 collective bargaining agreements receiving approximately 2% annual wage increases in current contracts.

The county maintains a solid degree of expenditure flexibility. In FY 2015, carrying costs were approximately 13% of governmental expenditures. County management maintains a large degree of control over staffing levels and implementing workforce reductions.

Long-Term Liability Burden

The county's long-term liability burden is low, with debt and pension liabilities at 6% of personal income. Direct debt totals approximately $1.1 billion and overlapping debt another $2 billion. Only approximately 17% of the total $3.8 billion liability burden is in the form of unfunded pension liabilities. The county does not have immediate plans for new general obligation debt.

The city participates in the Ohio Public Employees Retirement System (OPERS), which is a cost-sharing, multiple employer defined benefit pension system. Fitch estimates the ratio of assets to liabilities to be 78% assuming a 7% discount rate.

Operating Performance

Fitch believes that the county has maintained a high 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 the high level of transfers out of the general fund to pay for large economic development projects over the last few years has ended, as those projects have been completed. Fitch expects that the county's available reserve levels as a percentage of general fund expenditures, which have remained at above 29% since fiscal 2009, will remain well above the 'aaa' reserve safety margin level throughout the economic cycle.

The county has made consistent efforts to maintain a high level of available reserves in the recent economic recovery, partially in recognition of the relatively high volatility in its sales tax revenue stream. Current available reserve levels are above the county's formal policy of maintaining at least 25% of expenditures in the general fund. Fiscal 2015 ended with reserves at 56% of spending, and management expects FY 2016 operations to be balanced after a 10% reduction in appropriations from FY 2015.

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.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013371

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings, Inc., New York
Media Relations
Elizabeth Fogerty, +1-212-908 0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Director
Matthew Wong, +1-212-908-0548
or
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Senior Director
Arlene Bohner, +1-212-908-0554
or
Committee Chairperson
Managing Director
Laura Porter, +1-212-908-0575

Contacts

Fitch Ratings, Inc., New York
Media Relations
Elizabeth Fogerty, +1-212-908 0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Director
Matthew Wong, +1-212-908-0548
or
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Senior Director
Arlene Bohner, +1-212-908-0554
or
Committee Chairperson
Managing Director
Laura Porter, +1-212-908-0575