Fitch Ratings has upgraded the ratings on the following general obligation limited tax (GOLT) bonds to 'AA-' from 'A+':
--$47.3 million GOLT capital improvement and refunding bonds series 2004;
--$33.4 million GOLT capital improvement and refunding bonds series 2006;
--$34.6 million GOLT capital improvement and refunding bonds series 2008;
--$26.8 million GOLT capital improvement and refunding bonds series 2008B.
The Rating Outlook is Stable.
The bonds are secured by the authority's general obligation, limited tax pledge, which levy is subject to the ten-mill limitation as well as a pledge of a 1% county-wide sales tax.
KEY RATING DRIVERS
ENHANCED BONDHOLDER SECURITY; AMPLE COVERAGE: The upgrade reflects enhanced bondholder security associated with the creation of the sales tax security with bonds scheduled to sell later this month. The 1% countywide sales and use tax is now explicitly pledged to both outstanding GOLT bonds and the newly created sales tax bonds and additional debt is now subject to a strong 2.0x additional bonds test. The sales tax generates ample coverage for the bonds and provides diversity to the revenue stream, offsetting fluctuations in fare revenue.
GOLT PLEDGE MARGINALLY BENEFICIAL: Fitch's rating on the GOLTs reflects the terms of the 2012 bond documents which revise the definition of authority indebtedness to include revenue bonds, effectively putting both GOLT and sales tax securities on parity. While GOLT bondholders benefit from the authority's general obligation limited tax pledge, no property tax has ever been levied, as sales tax coverage on all debt exceeds 8.0 times.
PROACTIVE MANAGEMENT LENDS RESILIENCE: Management has taken action to ensure financial integrity, including raising fares and cutting services during the recent economic downturn. Recent improvement in sales tax revenues have allowed for modest service expansion and stabilization of fares.
MANAGEABLE CAPITAL NEEDS: Most of the authority's planned system expansions are complete. The most recent project came in on time and within budget. Future capital needs are modest and appear quite manageable, given relatively low debt levels and the authority's current resources.
ENHANCED BONDHOLDER SECURITY
With the series 2012 proposed sales tax bond sale the authority has revised outstanding bond documents to enhance bondholder security. The two main changes were the definition of indebtedness that now includes GOLT bonds and authority revenue bonds, the first series of which will be the 2012 sales tax bonds. Under the new definition, GOLT and revenue bonds are essentially parity obligations with gross sales tax revenues pledged to pay both types of debt. County voters approved the 1% tax in 1975 and the tax has no expiration.
The documents also include a strong additional bonds test requiring 2.0x coverage of existing and planned indebtedness from the strongest of the last 12-18 consecutive months' sales tax collections. Under the old documents there was no ABT and while sales tax revenues were used to pay GOLT bonds, GOLT bondholders had no security interest in sales tax revenues.
Under the terms of the Trust Agreement, the state of Ohio collects the sales and use taxes and makes monthly deposits to the trustee. Each month, the trustee makes deposits sufficient to fund 1/6th of interest and 1/12th of principal on both GOLT and sales tax bonds into the Bond Retirement Fund, and releases the remainder to the authority for operations.
BROAD, STABLE ECONOMIC BASE
The county's economy is diverse (rated 'AAA/AA+' GOULT/GOLT by Fitch), rooted in the long-standing health care and higher education sectors which helped to offset the contraction in the manufacturing sector during the recession. The county's tax base includes a number of wealthy, highly rated cities and suburbs. Cleveland (rated 'A+'; Stable Outlook) is the economic engine of the county, but represents less than 20% of the tax base.
County unemployment rates have been trending positively, with jobs growth outpacing expansion of the labor force. The seasonally unadjusted rate of 8.0% in February 2012 compared favorably to the state's rate of 8.5% and the U.S. rate of 8.7%. County income levels are mixed with per capita income levels above state and national levels and median household income slightly below state and U.S. averages.
PLEDGED SALES TAX PROVIDES AMPLE COVERAGE
Sales tax receipts for 2010 generated 9.4x coverage of current annual debt service (ADS) and 8.6x coverage of maximum annual debt service (MADS). Unaudited MADS coverage for 2011 is 8.4x. The economically sensitive sales tax receipts have exhibited volatility in recent years; the 2009 levels were 11.5% below the pre-recession peak, recorded in 2007. The authority benefited from a state-wide change in 2010 which expanded the base to include items not previously taxed. This change boosted the authority's sales tax revenues by over $8 million, or 5.5% in 2010. Officials report that, absent the expansion, sales taxes would have remained stagnant in 2010.
Sales tax collections are outperforming authority projections with unaudited fiscal 2011 results growing 6.1% over 2010, far in excess of the authority's modest 1.2% projected increase. Fiscal 2012 year-to-date receipts are also above budget and the authority expects 3.4% growth through year end. The authority has prudently kept projections for 2013 and 2014 at the more conservative 1.5% growth level. Fitch stress testing over the projection period demonstrates strong MADS coverage of at least 7x for existing and planned debt, even if the sales tax were to experience moderate 5.5% annual declines.
The strong coverage of debt service by sales tax receipts is attributable to the authority's reliance upon the residual sales tax revenues for operations. Despite their volatility in recent years, sales tax revenues have provided an important source of diversity to the authority's revenue stream. Sales taxes contributed approximately 82.3% of operating costs in 2011.
The authority has an internal policy of achieving a 25% farebox recovery ratio, which it has been closer to approaching in recent years. Preliminary 2011 data shows the authority reached the 23% farebox recovery threshold, which also reflects the authority's service reductions.
GOLT PLEDGE MARGINALLY BENEFICIAL
While the outstanding GOLT bonds are secured by the authority's general obligation, limited tax pledge, the levy has not been needed due to strong coverage of debt service and operations provided by the sales tax. Ad valorem tax revenue would be generated from the currently levied 10-mills on all taxable property that is shared by all jurisdictions within Cuyahoga County ('inside millage').
As part of the annual budget process the authority certifies its revenue to the county budget commission and since inception has shown an ability to cover all expenses without the benefit of the ad valorem tax. It is during this annual budget process that the county commission would provide the authority with an adequate portion of the inside millage to provide sum sufficient coverage of LTGO debt service if authority revenues were insufficient.
With such strong coverage of authority debt from sales tax revenues, the added value of the LTGO pledge is not reflected in the rating. Fitch could make a rating distinction in the future in the very unlikely stress scenario should sales tax revenues decline to below sum-sufficient levels.
PROACTIVE MANAGEMENT LENDS RESILIENCE
The authority has demonstrated a willingness to raise revenues to adequately fund operations including fare and fuel charge increases. As a result of raising fares and the need for the authority to cut service to maintain financial ratios, customer ridership has moderately fluctuated. After consecutive declines of 14.0% in 2009 and 10.4% in 2010, ridership is projected to increase 3.6% to 46.2 million in 2011. Ridership remains down 20.2% from its peak in 2008 of 57.9 million.
Operating expenses, which declined slightly in 2009, declined by a further 12.8% in 2010 due to wage and service cuts. Expenses for 2011 came in under budget, increasing by only 1.1% due to a restoration of a 3% wage cut for non-union employees, zero increase for unionized personnel, and a slight return of service. The fiscal 2012 budget calls for a 5.2% increase in operating expenses, resulting from a 3% wage increase, further service expansion, as welling as hiring 50 new employees.
MINIMAL BORROWING NEEDS
The series 2012 sales tax bonds scheduled for sale later this month will include approximately $25 million of new money with the rest refunding certain outstanding LTGO debt for an estimated savings in excess of 4% of the refunded par. The authority is not anticipating any near-term major capital projects, although an expansion of the blue line is possible and is dependent on the level of federal funding that can be secured and whether the obligation can be accommodated within the present revenue stream. The authority plans to partially offset loss of federal stimulus funds with a new three-year funding plan from Ohio Department of Transportation, which represents a large increase in overall state funding for transportation. The authority estimates additional debt issuance of approximately $25 million every other year.
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, Zillow.com, National Association of Realtors and Underwriter.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria