Fitch Rates Parma, OH's General Obligation Refunding Bonds 'AA-' (ULTGO) and 'A+' (LTGO)
Fitch Rates Parma, OH's General Obligation Refunding Bonds 'AA-' (ULTGO) and 'A+' (LTGO)
Fitch Ratings assigns the following ratings to Parma, OH (the city) bonds:
--$990,000 park acquisition general obligation refunding bonds, series 2013 (unlimited tax) 'AA-';
--$4,800,000 municipal facility improvement general obligation bonds, series 2013 (limited tax) 'A+'.
The bonds are scheduled for negotiated sale on May 1st or 2nd. The unlimited tax and limited tax bonds are being issued to advance refund a portion of the city's 2003 and 2005 bonds, respectively.
In addition, Fitch affirms the following ratings:
--Approximately $15.6 million in outstanding limited tax general obligation bonds (series 2006, 2005, 2003, 2000, 1999) at 'A+';
--Approximately $1.9 million in outstanding unlimited tax general obligation bonds (series 2003) at 'AA-'.
The Rating Outlook is Stable.
The ULTGO bonds are secured by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
The LTGO bonds are secured by the city's full faith and credit and its ad valorem tax, subject to the 10-mill limitation.
KEY RATING DRIVERS
IMPROVING FINANCIAL POSITION: Higher income tax receipts combined with conservative budgeting and expense control have stabilized financial operations and strengthened reserves to adequate levels.
CONCENTRATED ECONOMY AND FINANCES: The city's economy features a dependence on the automotive sector. City finances are also reliant on economically sensitive income tax revenues associated with the auto industry.
STRONG DEBT PROFILE: City debt levels are low, debt is rapidly amortized, and future capital needs are minimal. Total expenditure levels associated with debt service, pension contributions, and other post-employment benefit (OPEB) payments are below average.
LTGO RATING DIFFERENTIAL: The 'A+' rating for the LTGO bonds reflects the general credit characteristics of the city as well as its limited taxing capacity related to the LTGO bonds.
MAINTENANCE OF ADEQUATE RESERVES: Given the city's reliance on economically sensitive income tax revenues, rating stability will depend on management's ability to maintain adequate financial flexibility and reserve levels.
Parma is located in Cuyahoga County, eight miles south of downtown Cleveland. It is the seventh largest city in the state of Ohio. Parma's population of about 81,000 declined by about 5% from 2000 to 2010, as compared to a county decline of 8% for the period and a 1.6% increase for state.
ECONOMIC STABILIZATION BUT ONGOING AUTOMOTIVE CONCENTRATION
The local economy is primarily anchored by a General Motors (GM) stamping plant, the largest employer with approximately 2,382 workers. Favorably, operations at the facility have stabilized, benefiting from transferred operations from other plants outside of Ohio. Continued investments in the facility are expected as part of GM's plans for the next generation Chevrolet Cruze automobile. Three health care facilities, a community college and other government sector employment lend stability to the area economy.
The city's labor force and employment numbers declined from January 2012 to January 2013, compared to state and national levels that grew slightly or remained fairly stable over the same time period. Because the employment decrease (3.0%) was larger than the labor force decline (2.4%), the year-over-year unemployment rate increased to 8.2% in January 2013 compared to 7.6% in January 2012, reversing a declining trend but slightly below the state (8.4%) and national rates (8.5%).
City per capita income is close to county (93%), state (98%), and national (90%) averages, and its median household income exceeds county and state figures. The city poverty rate (8.3%) is well below state and national levels (about 14%).
IMPROVED FINANCES RELY HEAVILY ON INCOME TAX COLLECTIONS
City finances have improved in recent years, with operating surpluses after transfers in 2009 - 2011 following an operating deficit in 2008. The city's fiscal year coincides with the calendar year. For 2011, the general fund recorded an operating surplus after transfers of $1.8 million (4.4% of expenditures) and an unrestricted fund balance (the sum of committed, assigned, and unassigned balances under GASB 54) of $6.4 million, or an adequate 14.5% of general fund spending. On a non-GAAP budget basis, the general fund balance was $3.9 million or 8.6% of spending compared to $4.5 million or 10.2% of spending in 2011.
The city has been able to align expenditures with revenues negatively affected by the economy and a reduction in local government funds (LGFs) from the state. These have included the implementation of furlough days for the past three years (2010-2012). For 2012, the city saw LGFs cut by 25% and expects an almost 50% reduction from 2011 receipts in 2013. Continued active response to revenue declines and the maintenance of adequate financial reserves over the near term will be important to maintaining the current rating.
General fund operations are primarily supported by the city's 2.5% income tax which yields over 60% of general fund revenues. Income tax revenues declined by about 9% in 2009, reflecting workforce reductions at GM, but have improved over the last three years as GM operations have stabilized. Income taxes have increased by 2.4%, 3.6% and 5.1% in 2010, 2011 and 2012, respectively. Although recent auto sector stabilization is a positive factor for the city finances, the dependence on income tax revenues related to the automotive industry remains a credit concern.
CONSERVATIVE BUDGETING PRACTICES
City management employs conservative budgeting practices and always budgets for drawdowns in the general fund balance. The 2013 budget keeps revenues and expenditures fairly flat with no increase in income taxes despite three years of growth. Management is projecting a worst case scenario of a $1.5 million ending general fund cash balance or 3.3% of spending. Fitch believes this a conservative estimate given the city's history of outperforming budget.
ASSESSED VALUE DECLINES CONTINUE
Reflective of economic contractions in recent years, the city's property tax base has declined by 23% since 2007 including 12% in 2013 due to a county-wide sexennial reassessment. Assessed values should stabilize with the city expecting an increase of 2% over the next three years. The city is somewhat insulated financially from assessed value declines as property taxes only account for about 7.5% of general fund revenues.
Ohio law establishes a maximum millage of 10 mills for all overlapping taxing units, without a vote of the people. Parma's total millage is currently about 7.1 mills, 3.4 mills of which is the city's share subject to the statutory cap. The city has a good track record of voter approval for renewal levies. A 2.0 mill police levy ($3 million annually) was renewed in 2012 by over 60% of the voters.
STRONG DEBT PROFILE
The city's debt profile is strong due to a statutory designation of a portion of income tax receipts for capital needs. Overall debt is low at $635 per capita or 1.3% of market value. Amortization is rapid with 82% of debt retired in 10 years and future capital needs are minimal.
The city provides pension benefits through state-administered plans (OPERS and OP&F) and funds 100% of its annually required contribution. At Dec. 31, 2011, the statewide OPERS plan was funded at 79.1%. Based on Fitch's adjusted rate of return of 7.0%, the ratio is estimated at 71.2%, which Fitch considers midrange. Total debt service, required pension contribution, and OPEB payment requirements for 2011 were below average and manageable at 10.3% of total government fund expenditures.
Additional information is available at 'www.fitchratings.com'
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 National Association of Realtors and Financial Advisor.
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
Fitch Ratings, Inc.
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