TEXT-Fitch affirms Hamilton County, Ohio sales tax bonds at 'A+'
Feb 14 - Fitch Ratings has affirmed the 'A+' rating on the following Hamilton County, Ohio (the county) obligations: --$558.5 million outstanding sales tax bonds. The Rating Outlook is Stable. SECURITY The bonds are secured by a dedicated half-cent sales tax approved by voters in March 1996. The bonds are also secured by a debt service reserve fund. KEY RATING DRIVERS NARROW DEBT SERVICE COVERAGE: Sales tax coverage of maximum annual debt service (MADS) is slim although sufficient for the rating category. Fitch expects continued inherent revenue volatility but overall adequate coverage. ADEQUATE LEGAL PROTECTIONS: The additional bonds test is satisfactory, and the debt service reserve is set at less than the usual level. A sales tax stabilization fund and the required levy of the full half-cent sales tax until all outstanding bonds are retired increase bondholders' protections. SOUND RESERVES DESPITE PRESSURED FINANCES: Implemented expenditure reductions have allowed the county to rebuild general fund reserves. Revenues have decreased recently and the county has already implemented steep expenditure reductions. DEEP AND DIVERSE ECONOMY: The county's substantial economy is anchored by the City of Cincinnati and bolstered by several Fortune 500 corporations, the University of Cincinnati and numerous large healthcare institutions. Wealth levels are generally above national averages. QUALIFIED AUDITS: Qualified opinions were issued for the fiscal 2007 - 2010 audits regarding accounting for certain inter-fund transfers, outside of the general fund. Fitch notes as a credit weakness the fact that no subsequent audits have yet been released but takes some comfort in the robust unaudited information provided by management and the county's overall conservative budgeting and prudent planning. MANAGEABLE DEBT, PARTICIPANT IN UNDER-FUNDED PENSION: The county's total aggregate debt burden is moderate, pay-out of principal is below average and future debt issuance appears limited. Fitch believes there are potential pressures from increased contributions to the state pension system. RATING SENSITIVITY BUDGETARY PRESSURES AND SOUND RESERVES: The county is projecting out-year shortfalls and the utilization of reserves in the general fund, although Fitch notes that prudent budgeting has historically resulted in stable and sound reserve levels. CREDIT PROFILE Hamilton County, home to Cincinnati, is located on the border of Kentucky and Indiana in southwest Ohio. The recent census showed a notable population decline to 800,362. RECOVERING SALES TAX COLLECTIONS Sales tax collections rebounded by 9.9% over the past three years, after declining a cumulative total of 8.6% due to the economic downturn. Fitch believes there is merit to management's expectation that sales taxes will trend positively in 2013 and believes that the county has budgeted collections conservatively. Sales tax revenues, the county's largest general fund revenue source at 34%, have increased for each of the past three years, and the county anticipates that fiscal 2012 collections will be at a record high. Additionally, the county has the flexibility to increase the sales tax rate by 1/2%, although an increase would be subject to a referendum. NARROW MADS COVERAGE; SOLID CURRENT COVERAGE Coverage of annual debt service (ADS) was solid at 2.5 times(x) in 2012. Debt service coverage declines through the life of the bonds, given the escalating debt service schedule. ADS coverage drops to an adequate 1.2x by 2027, the MADS year, assuming no sales tax growth. A 17% decline in revenues would result in 1x MADS coverage. Based on the small 1% average annual growth of over the past 10 years, Fitch expects coverage to remain satisfactory. ADEQUATE LEGAL STRUCTURE The pledged half-cent sales tax was implemented for the purpose of providing for stadium and riverfront related expenditures and property tax relief for the county. Pursuant to statutory provisions, the county may not repeal the half-cent sales tax until all bonds secured by half-cent sales tax are retired. Additional leveraging requires that the aggregate proceeds of the greatest 12 consecutive months in the 18-month period preceding debt issuance must cover maximum annual debt service (MADS) on outstanding parity bonds by at least 1.15x, which Fitch categorizes as somewhat weak. Issuance of additional parity bonds must also be in accordance with the state statute, which requires that MADS cannot exceed the average of the prior two years of sales tax collections. The county has no current plans to further leverage the sales tax security. Bondholders receive additional protection from a sales tax stabilization fund and a debt service reserve fund. The indenture mandates maintaining the sales tax stabilization fund at a minimum of 10% of the sales tax collections from highest year. While the county has discretion over the use of these funds, debt service payments have priority over any use. The current value of the stabilization fund is $6.5 million. The debt service reserve fund is set at one-half the lesser of MADS or 125% of average annual debt service, below usual levels. In conformance with the indenture requirements, the county has begun cash funding the reserve in lieu of the original surety bonds. In 2011, the county contributed $9.5 million of combined cash and bond proceeds. An annually renewable credit support instrument recently added $9.4 million. The county intends to fund the remaining $8.7 million in 2014 through an expansion of the credit support loan, monthly deposits, or bond proceeds. DIVERSE REGIONAL ECONOMY The county's economy continues to benefit from the stability of a diverse mix of large employers. Several Fortune 500 corporations, as well as the University of Cincinnati and Cincinnati's Children's Hospital, make the county a regional center for healthcare and higher education employment. The Banks Riverfront Development Project, an $800 million mixed use project, is well-underway and is proving to be an attractive residential option that Fitch believes can support future tax-base growth. The county's 6.2% December 2012 unemployment rate has recovered strongly over the past year and is below the nation's 7.6%. Income indicators are somewhat mixed, although generally above national and regional indices. CONSERVATIVE BUDGETING YIELDS SOUND RESERVE LEVELS The county's financial position has stabilized following sizeable operating deficits in fiscals 2006-2008, although remains challenging due to both revenue and expenditure pressures. The county responded prudently to recession-related revenue shortfalls by budgeting revenues conservatively and implementing substantial expenditure reductions. While the population decline has aided the county in its efforts to shrink the budget, Fitch believes that expenditure reductions have been steep and that the county retains only a few cost-cutting plans that would not reduce service delivery. The county concluded fiscal 2010, the last audited period, with a $16.1 million operating surplus, equal to 8.6% of spending, resulting in a healthy unreserved FB of 28.8% of spending. On a budgetary basis, the county calculates its reserve balance at $24.4 million, equal to 11.5% of budgeted on-going expenses, an increase from the 7.7% of fiscal 2009. In both years, reserves exceeded the budgets. BUDGETARY PRESSURES REMAIN County projections indicate continued budget pressure but management anticipates that reserves will remain around levels achieved in fiscal years 2009 and 2010. Management indicated that reserves will equal about 12.3% of budgeted on-going expenses when the fiscal 2012 books close. The fiscal 2013 budget shows a slight decline to 11.7%. Fitch believes that the county's continued practice of conservative budgeting should support long term fiscal stability. QUALIFIED OPINIONS AND DELAYS IN AUDITED FINANCIALS Audited financial statements since at least fiscal 2004 have contained a qualified opinion, pending resolution of reviews by the Auditor of the State of Ohio (the State Auditor) and the Ohio Department of Job and Family Services (ODJFS) regarding accounting and management practices of the county's social service programs (HCJFS). The U.S. Department of Health and Human Services (HHS), the funding agency, has notified ODJFS that $59 million was improperly expended between July 1, 2000 through June 30, 2004. ODJFS would have the first responsibility for the payment of any sums to HHS; however, HHS has indicated that the obligation to make the payment could fall on both ODJFS and HCJFS. A final determination has not been made to date. No allegations of fraud or criminal activity were ever raised. The investigation has resulted in the county's inability to release audited financial statements for fiscal 2004 - 2006. The State Auditor has issued a qualified opinion for subsequent audits through fiscal 2010 based upon certain payments to HHS that were charged to an incorrect fund in accordance with US GAAP. Management anticipates continued qualified audits until the HHS payment review is completed. County audits are routinely released late. The county states that it cannot dictate the timing of its audits, given that according to state law the state acts as the auditor. The county anticipates that the 2011 and 2012 audits will be published in 2013 and 2014, respectively, although Fitch notes that the county has in the past been optimistic about publication dates. In the interim, annual financial results on a budgetary basis have provided sufficient transparency. DEBT AND PENSION Overall debt is moderate at $3,006 per capita and 4.6% of market value. Amortization is somewhat below average at 42.7% of principal retired within 10 years. The county has no plans for additional general obligation debt issuance to fund its modest $143.8 million capital improvement plan. Debt service costs are manageable at about 5.5% of governmental spending. County employees participate in the Ohio Public Employee Retirement System (OPERS) and to some extent the State Teachers Retirement System of Ohio (STRS Ohio). OPERS and STRS Ohio each administer three separate plans, including a cost-sharing, multiple-employer (CSME) defined benefit plan and a defined contribution plan. Both OPERS and STRS are inadequately funded when computed with Fitch's adjusted 7% discount rate. The pension plans also provide OPEB for eligible employees. In fiscal 2010, the county contributed $36.4 million in pension costs and $11.8 million in OPEB pay-go, equal in total to around 6% of governmental spending. Longer term payment pressures may arise if the state attempts to increase the funded ratios of its plans. 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 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 the National Association of Realtors. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012). Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria