NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the following city of Parma, OH bonds:
--$8.4 million limited tax general obligation (LTGO) bonds, series 2016.
Proceeds of the bonds will be used for the purpose to refund Municipal Facility Improvement Refunding Bonds, Series 2006 and to retire Dispatch Center Improvement Notes, Series 2016. The bonds are scheduled to sell via negotiation on Oct. 26.
Additionally, Fitch affirms the following ratings at 'AA-':
--Issuer Default Rating (IDR);
--$490 thousand park acquisition general obligation unlimited tax refunding bonds, series 2013;
--$11.850 million various LTGO bonds.
The Rating Outlook is Stable.
The LTGO bonds are secured by the city's full faith and credit and its ad valorem tax, subject to a 10-mill limitation. The GO bonds are backed by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
KEY RATING DRIVERS
Parma's 'AA-' IDR is based on the city's very low long-term liability burden, solid expenditure cutting flexibility, and moderate independent legal ability to raise revenues. Management has made consistent efforts to support financial flexibility during times of economic recovery and has positioned the city to maintain strong gap closing abilities.
Economic Resource Base
The city is located in Cuyahoga County, eight miles south of downtown Cleveland. The city is anchored by a stable and growing economic base that is diverse and primarily comprised of manufacturing, healthcare, and education. Population decreased 6.6% from 2000-2015 to 79,937 and was primarily attributable to regional losses in manufacturing jobs during the great recession. Population loss is showing signs of slowing, as population declined a modest 0.1% from 2014 to 2015, reflecting some recent economic stability although year over year unemployment rates recently moved upwards.
Revenue Framework: 'bbb' factor assessment
Fitch expects revenue performance to be fairly stagnant, due to historical revenue growth occurring below the rate of inflation. The city has moderate ability to independently raise revenues from non-taxing sources.
Expenditure Framework: 'aa' factor assessment
The city's rate of expenditure growth is expected to be in-line with revenue growth. Expenditure flexibility is solid due to moderate carrying costs for debt service, pension, and other post-employment obligations and solid workforce control
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden including pension liabilities and overall debt is low relative to personal income.
Operating Performance: 'aa' factor assessment
Gap-closing capacity is strong due to solid expenditure flexibility and prudent budget controls. Management makes consistent efforts to support financial flexibility at times of economic recovery. Fitch expects management to continue conservative budgeting practices.
Maintenance of Financial Flexibility: The rating is sensitive to material changes in revenue and expenditure flexibility and maintenance of solid financial performance, which Fitch expects the city to maintain through a typical economic cycle.
Voter Support of Renewal Levies: Failure of voters to support renewal levies could decrease financial flexibility and put downward pressure on the rating.
Parma's economy is anchored by a General Motors (GM) stamping plant, one of the largest employers with approximately 1,400 workers. GM recently made a $14 million investment in new equipment for the plant, which Fitch believes reinforces the company's commitment to the facility. Three health care facilities, a community college and other government sector employment add diversity to the local economy.
Wealth indicators are positive, with poverty levels significantly below the state and nation. City income levels measured on a per capita basis are generally comparable with the state and nation. Taxable assessed values (TAV) have declined for the past three years, but management expects a modest increase due to elevated building permits that indicate improved building activity and significant new economic development, including investments made by Kaiser Permanente, Chick-fil-A, and the small business community.
The city relies heavily on personal income tax levies to support its operations, with the income tax accounting for 71% of revenues. Property taxes account for only about 7% of general fund revenues.
Historical revenue growth is below U.S. economic performance but above the level of inflation. Management estimates that income tax revenues will grow at least 2.25% annually reflecting improved economic activity. However, these estimates are conservative, as fiscal 2016 income tax revenue budget to actual are up approximately 6% year to date, due to wage growth and declining unemployment. Fitch believes that a growing employment base reinforces the expectation for future revenue growth.
Ohio state law limits cities non-voted income and sales taxes. Property tax levy 'inside mills' may be adjusted by the county, without receiving voter approval, up to 10 mills. The city levies 100% of county managed 3.4 inside millage rate. Parma has the ability to raise charges for fees and services to a level considered to be satisfactory when compared to a normal cyclical revenue decline.
The city has two renewal property tax levies, which when combined are equal to approximately 10% of general fund revenues. Revenues are collected by the police and fire levy funds and are used to support pension obligations. The millage is levied on five-year cycles, with both the police and fire levies on the ballot for renewal in 2016 and 2018, respectively. Voter approval for the levies is strong. Management expects ballot results to remain consistent with historical support.
The city's largest expenditure is for public safety, which comprises about 54% of total expenditures.
Fitch expects the city's natural pace of spending growth to be above expected revenue growth, given expectations for the city's revenue stream and the nature of its spending obligations. Rising public safety costs are due to the operation of a new multi-jurisdictional consolidated police, fire, and EMS dispatch center, as well as from modest salary increases, below the rate of inflation, for the city's 10 bargaining units. Nine of the 10 labor contracts will re-open for negotiation in 2017. Fitch expects that management will maintain favorable negotiating terms.
The city's expenditure controls are solid. Fiscal 2014 carrying costs for debt, pension, and other post-employment benefits (OPEB) are manageable at 13% of government spending.
Management exercises expenditure flexibility through public safety cost controls and the identification of non-essential discretionary spending categories. In addition, the city has pay-go capital plans, equal to approximately 5% of expenditures, which could be delayed during an economic downturn period. Fitch believes that management is well-positioned to manage its expenses and has demonstrated a willingness and ability to find cost savings.
Long-Term Liability Burden
The city has a low long-term liability burden with the net overall debt and unfunded pension liabilities totaling 3.7% of personal income. Approximately 80% of direct debt is scheduled for retirement within 10 years and the city reports no immediate plans for future borrowing. Fitch expects the long-term liability burden to remain low.
Parma provides pension benefits and OPEB through two state-sponsored defined benefit pension plans, the Ohio Public Employees Retirement System (OPERS) and the Ohio Police and Fire Pension Fund (OP&F). The combined plans reported an asset to liabilities ratio of 79%, assuming an 8% rate of return, as of Dec. 31, 2014. Using Fitch's more conservative 7% rate of return, the estimated asset to liabilities ratio is 70%.
Fitch believes the city has strong gap-closing ability, which well positions the city to respond to operational pressures during an economic downturn. Management's ability to build reserves in excess of their internal fund balance policy is attributable to low volatility in the city's revenue stream and through the use of strict expenditure controls. The city has routinely found personnel cost savings during times of economic pressure, and Fitch believes that management would continue to follow these practices during a moderate economic downturn.
Fitch considers budget management practices during times of economic recovery to be strong. The city has institutionalized many conservative budgeting practices and has demonstrated a willingness to take responsive policy action during times of economic stress. In addition to these practices, the city's additional expenditure flexibility mitigates some of the risk associated with the requirement for property tax rate renewals and lends additional stability though the economic cycle.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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