TEXT-Fitch rates Cuyahoga County, Ohio's LT GOs 'AA+'
Nov 16 - Fitch Ratings has assigned an 'AA+' rating to the following Cuyahoga County, OH (the county) bonds: --$101,900,000 (est.) limited tax general obligation (LTGO) capital improvement and refunding bonds, series 2012A and 2012B. The bonds are scheduled to be sold via negotiated sale during the week of Nov. 26. Proceeds will be used to finance certain public improvements and advance refund certain series of bonds. In addition, Fitch affirms the following ratings: --Outstanding LTGO bonds at 'AA+'; --Outstanding unlimited tax general obligation (ULTGO) at 'AAA'. The Rating Outlook is Stable. SECURITY The bonds are unvoted LTGOs secured by the county's full faith and credit pledge, subject to the state's 10 mill limitation. The ULTGO bonds are secured by the county's full faith and credit pledge and by a voter-approved debt service millage, outside general operating millage, that is adjusted to yield sufficient revenues to pay debt service payments. KEY RATING DRIVERS BROAD BASED ECONOMY: The county's economy is broad and stable, centered on health care and higher education. Economic development has been strong with a number of large projects currently under construction. BELOW-AVERAGE SOCIOECONOMIC INDICATORS: The county's below-average socioeconomic profile is characterized by a declining population, unemployment rates, which although improving, are still slightly above state averages, mixed wealth levels, and poverty rates above state and national averages. STRONG FINANCIAL POSITION: Audited results for 2010 and 2011 are not available and are slowly being processed as a result of a 2008 federal corruption investigation into several former county officials. However, unaudited results show continued strong reserve levels with audited results not expected to be materially different. STRONG AND CONSERVATIVE FISCAL MANAGEMENT: Despite dependence on economically sensitive sales tax, conservative budgeting and proactive management of expenses has resulted in strong financial operations and consistently healthy reserve levels. RESTRICTIVE TAXING ENVIRONMENT: Characteristic of Ohio, the county has a restrictive taxing environment, which is offset by a history of solid voter support for additional and renewal levies. MODERATE DEBT POSITION: The county's debt levels are moderate and should decrease as a result of modest future borrowing and above-average principal amortization. LTGO RATING: The 'AA+' rating reflects the general credit characteristics of the county as well as the limited taxing capacity related to the LTGO bonds. CREDIT PROFILE The county is located in northeastern Ohio with a population of 1.3 million and home to the city of Cleveland (ULTGOs rated 'A+; Stable Outlook by Fitch). BROAD-BASED ECONOMY ROOTED IN HEALTHCARE AND HIGHER EDUCATION Cleveland is the economic engine of the county and represents less than 20% of the tax base. Cuyahoga County has successfully diversified its economy away from manufacturing and continues to benefit from the stability of the healthcare and higher education sectors which now account for approximately 19% of metro area jobs, up from 14% a decade ago. Some of the county's largest employers include the Cleveland Clinic, University Hospitals and MetroHealth System. Construction is currently underway on a $465 million Medical Mart/Convention Center. The Center will be located in downtown Cleveland with a projected opening in 2013, and will be a showcase for medical technology. It is expected to be the foremost regional facility for conventions and medical trade shows, further enhancing Cleveland's healthcare sector. Economic development is a key focus of county management and supported by county residents as evidenced by a recently voter-adopted charter to include economic development as a core function of the county governance. In addition to the Medical Mart/Convention Center project, several other large projects are currently in construction including the $272 million Flats East Bank mixed-use project being built in an industrial area of Cleveland along the Cuyahoga River with a projected opening in spring 2013. The temporary site of the $350 million Horseshoe Casino opened in March 2012, with the permanent site projected to open in 2014. The county is headquarters to 14 Fortune 1000 companies including Progressive Corporation, Eaton Corporation, Sherwin Williams, KeyCorp and American Greetings. SLIGHTLY BELOW-AVERAGE SOCIOECONOMIC PROFILE Unemployment rates have historically been at or slightly above state rates. Measured at 6.9% in September 2012, the county's unemployment rate was down from 7.8% in September 2011, but above the state rate of 6.5% and the nation's 7.6%. The county's 2010 population totaled about 1.3 million, a decline of 8.2% since 2000. County income levels are mixed with per capita income levels slightly above state levels and median household income slightly below the state. The county's poverty rate at 16.4% is above state and national averages of 14.2% and 13.8%, respectively. STRONG AND CONSERVATIVE FISCAL MANAGEMENT RESULTS IN HEALTHY FINANCES The county's strong reserve position is a key credit offset to its dependence on economically sensitive sales tax receipts which represent approximately 60% of general fund revenues. After an 8.8% decline in 2009, sales tax rebounded in 2010 due to increased economic activity and the state expansion of the sales tax base. In 2011, sales tax increased by 6.6% over 2010 and is projected to increase by 4.9% in 2012. Management has been proactive in reducing expenses via consolidated and streamlined operations, union concessions, program cuts, an early retirement incentive plan, furlough days, layoffs and attrition. On an unaudited GAAP basis, 2010 general fund reserves totaled $160.7 million, or a high 38% of spending. The reserves were drawn down from $212 million or 63.5% of spending in 2009 to fund construction on the Medical Mart project. The county increased the sales tax by 1/4% in October 2007 to provide sufficient additional monies to the general fund to allow the county to utilize certain non-tax revenues, in addition to other available revenues, to finance the construction of the new Medical Mart/Convention Center. Since 2008, funds have been accumulating in the general fund from the sales tax increase and started to be drawn in 2010 when construction was started on the project. The county implemented GASB 54 in 2011. On an unaudited basis the unrestricted (sum of committed, assigned and unassigned) balance totaled $222.6 million, or a very strong 65.2% of general fund spending. Positively, the county has formally adopted a policy to maintain on a budgetary basis a reserve-to-expenditures of 25% in the general fund. The county has consistently exceeded this ratio. For the third quarter ending Sept. 30, 2012 the ratio was 33.8% and is projected at 39.2% at year-end 2012. Fitch considers the county's history of consistently maintaining high reserve levels a key credit strength. For the nine months ending Sept. 30, 2012, general fund revenues are on budget and expenditures are 2.3% below budget. On a cash basis, the general fund balance at year-end Dec. 31, 2012 is projected to be $187.1 million, compared to $183.8 million at Dec. 31, 2011. The 2013 budget forecasts a reasonable sales tax increase of 3.75% and a small general fund deficit of $3.5 million (1% of expenditures). Management will address the deficit during an upcoming 2013 budget update process. Given management's conservative fiscal and budgeting practices, Fitch expects the county to continue producing strong results and maintaining healthy reserve levels. Fitch also notes the delay in audited financial results for 2010 and 2011 due to a federal corruption investigation that began in July 2008 into several former county officials related to procurements. General fund reserves were reportedly not affected by these employees' actions and remain healthy according to unaudited results. For the past couple of years, auditors have slowly processed the county's financial statements while the investigation was underway. There is one remaining trial set for the first quarter of 2013 but primarily the county is past the embargo on its financial statements. The 2010 and 2011 audits are expected to be released by the state by year-end 2012. Management reports the audits are unqualified and have no material changes from unaudited numbers. The 2012 audit is expected to be released in CAFR form in a timely manner in 2013. Audited results for 2007 and 2008, which were released in July 2010, were also delayed but were consistent with the county's unaudited statements. Additionally, the 2009 audit was recently released with no material changes from unaudited numbers. RESTRICTIVE TAX ENVIRONMENT Property taxes comprise a small 4% of general fund revenues. Some of the county's operations (Health & and Human Services, Developmental Disabilities) are funded via voted tax levies accounted for in special revenue funds, all of which appear healthy. The restrictive taxing environment common to Ohio municipalities is somewhat offset by the county's solid voter support for additional and renewal property tax levies above the 10-mill 'inside' limitation. In March 2012, a 4.8 mill four-year health and human services levy was renewed by 70% of the voters. The county is currently undergoing a reappraisal and management expects that assessed valuation will be reduced. Based on the declines the county may be precluded from issuing additional unvoted general obligation debt but does have flexibility and could issue sales tax revenue bonds as unvoted funding. The LTGO rating of 'AA+' incorporates the limited nature of the tax pledge. MODERATE DEBT LEVELS The county's overall debt burden is moderate at $1,871 per capita and 2.8% of market value, and debt amortization is above average with 59% retired in 10 years. Debt service carrying charges are average at 9.6% of general and other government fund expenditures. The county's bond issuance for its five-year (2012-2016) capital improvement plan totals a reasonable $86.3 million. The county's policy for issuing new debt for capital improvements is to cash fund, when possible, during the construction of the project then reimburse cash expenditures with debt financing when appropriate. The county does not intend to issue debt until 2015 and may utilize either general obligation or sales tax revenue bonds. The county participates and continues to make 100% of its annual required contributions to the Ohio Public Employees Retirement System to fund both pension and other post-employment benefits (OPEB). Carrying costs for debt service, pension and OPEB is manageable at 20% of general and other government fund expenditures. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in the 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, National Association of Realtors. Applicable Criteria and Related Research: 'Tax-Supported Rating Criteria', dated Aug. 14, 2012. 'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012. Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria
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