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.
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
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.
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
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
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
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
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
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
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