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Fitch Affirms Cleveland, OH's GO Bonds and IDR at 'A+'; Outlook Stable.

New York: Fitch Ratings has affirmed the 'A+' rating on the following Cleveland, OH limited tax general obligation (GO) bonds:

--$13.5 million, series 2007C;

--$310,000, series 2008A;

--$2.1 million, series 2009A.

In addition, Fitch has affirmed the city of Cleveland's Issuer Default Rating (IDR) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are unvoted general obligations of the city payable by ad valorem property taxes within the 10-mill property tax limitation and municipal income taxes pledged under the city's general bond ordinance. The city may also use any available funds (state disbursements, interest earnings, all nontax revenues) for debt service.

ANALYTICAL CONCLUSION

The city's 'A+' IDR reflects a limited revenue framework that is offset by solid expenditure controls, an elevated but still moderate long-term liability burden, and very strong gap-closing capacity. Fitch believes that the city would manage through downturns while maintaining an adequate level of fundamental financial flexibility.

Economic Resource Base

The city is located in northeastern Ohio on the southern shore of Lake Erie and is the county seat of Cuyahoga County ('AA+' IDR/Outlook Stable). The city's population declined a significant 17% from 2000 to 2010, but the decline has slowed, with an estimated 2017 population of 385,525, down less than 3% from 2010.

KEY RATING DRIVERS

Revenue Framework: 'bbb'

Fitch expects the city's revenue growth to be stagnant, remaining at a rate below the rate of inflation. The city has no independent legal ability to raise revenue.

Expenditure Framework: 'a'

The city's expenditures are likely to grow at a rate above natural revenue growth, due to the expectations for low revenue growth. Flexibility is supported by moderate costs for servicing debt and other long-term liabilities.

Long-Term Liability Burden: 'a'

Cleveland's long-term liability burden, including pension liabilities and overall debt, is elevated but still in the moderate range relative to personal income.

Operating Performance: 'aa'

The city has very strong gap closing capacity, balancing its lack of control over revenues with solid reserve levels and expenditure controls.

RATING SENSITIVITIES

Continued Sound Reserve Levels: The 'A+' IDR and GO rating is sensitive to material changes in Fitch's expectations for available reserves. Maintenance of reserves above the 'aaa' reserve safety margin through a downturn could place upward pressure on the rating.

Expectations for Stagnant Revenue Growth: The ratings are also sensitive to changes in revenue growth trends. Weaker growth than expected could put downward pressure on the rating. Improved prospects, which Fitch views as unlikely, could enhance the revenue framework and potentially the rating.

CREDIT PROFILE

The city's weak socioeconomic profile is characterized by a declining population, below average income levels, and a high poverty rate. Unemployment rates are consistently above state and national levels. As manufacturing employment has declined, the city's economy has shifted to the more stable health and education sectors in recent years. The Cleveland Clinic is the largest private employer. Other large employers include University Hospitals of Cleveland, MetroHealth System, KeyCorp, and Case Western Reserve University.

The city reports estimated fiscal 2018 AV increases approaching 8% following the county's six-year reappraisal, recapturing a large portion of AV declines since the last full reappraisal. Going forward, Fitch expects assessed value to increase modestly given ongoing commercial development and continued moderation in high foreclosure rates. Property tax collections improved in fiscal 2017, with a current collection rate of over 90%, up from rates in the low-80% range or below in most previous years, largely due to improved collection processes by the county.

Revenue Framework

The city's revenue comes largely from income taxes, which made up 67% of FY 2017 general fund revenue, an increase following the voter approval of an income tax increase from 2% to 2.5%. The remainder is comprised of charges for services, other miscellaneous revenue, and a comparatively small amount of property taxes (under 6%).

Fitch believes that future revenue growth is likely to be in line with historical revenue growth (net of the 2017 income tax rate increase), lagging both CPI and GDP. The city projects that income tax revenue will grow at 2% and that most other revenue sources will grow at 1% to 2%.

The city is limited in its ability to legally raise revenue independently. The city charter provides that the maximum total property tax rate that may be levied without a vote for current operating expenses is 8.35 mills. The city is currently at that limit. The city has no voted property tax levies, and none are contemplated as income tax revenues should be sufficient to support operations for several years. Increases in the income tax require voter approval, with voters approving the recent increase in November 2016.

Expenditure Framework

The city's largest expenditure item is public safety at 62% of FY 2017 general fund expenditures. The city also spent 18% on general government administration and 14% on public works expenditures.

Fitch expects that the city's natural pace of expenditure growth will be above the expected revenue growth rate. The largest drivers in the city's expenditure items include costs related to the labor force. These expenditures are expected to increase at a rate marginally above inflation annually given salary and fringe benefit increases. Additionally, the city continues to operate under a consent decree resulting from an investigation by the U.S. Department of Justice. The consent decree calls for changes in training of police recruits and experienced police officers and an independent monitor which mildly inhibit expenditure flexibility.

The city maintains a solid degree of expenditure flexibility. Carrying costs for debt service and retiree benefits are moderate at approximately 19% of governmental expenditures in FY 2017. The city has a descending debt service schedule over the next five years, gives the city some flexibility. Management also has a moderate degree of control over staffing levels and implementing workforce reductions.

Long-Term Liability Burden

The city's long-term liability burden is elevated but still in the moderate range, with debt and pension liabilities at around 22% of personal income. Overall debt is about 38% of the long-term liability. The city is required to use one-ninth of income tax receipts (restricted income taxes) solely for capital improvements or debt service on obligations issued for capital improvements. The city has some moderately sized bonding plans in its three-year capital improvement plan, but this is not expected to significantly increase the long-term liability burden.

The city participates in the Ohio Public Employees Retirement System (OPERS), which is a cost-sharing, multiple employer defined benefit pension system, as well as the Ohio Police & Fire Pension Fund (OP&F), a cost-sharing multiple employer system. Fitch calculates the ratio of assets to liabilities to be 60% assuming a 6% discount rate. The city pays the actuarially determined contribution.

Operating Performance

The city has a very strong level of financial resilience relative to potential revenue declines depicted by the Fitch Analytical Sensitivity Tool (FAST) in a moderate economic downturn. Following the voter approved increase in the city's income tax rate in fiscal 2017, the city's available reserves increased to around 25% of expenditures. Fitch expects that those available general fund reserves would remain above the 'aa' reserve safety margin level throughout a moderate recessionary period, although the city may be required to use its expenditure flexibility to do so. This considers the city's limited ability to increase revenue independent of voter approval and expectations that expenditures will grow at a rate above natural revenue growth.

The city has made efforts to maintain a solid level of available reserves in the recent economic recovery. The city had a small surplus in fiscal 2016 and a large surplus in 2017 due to the income tax rate increase, which generated around $83 million (14% of total general fund revenues) in additional revenue. While some of the additional revenue was used to pay for retroactive pay increases to collective bargaining units and to pay for recurring salary increases, a significant remaining amount bolstered available reserves. The city expects the additional revenue to continue to generate an operating surplus in upcoming years. The city has a policy of maintaining a rainy day fund within its general fund equal to 5% of general fund budgeted expenditures.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U3OH
Date:Dec 19, 2018
Words:1358
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