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HEALTH BENEFIT CLAIMS BONDS, SERIES 2010 Global Credit Research - 19 May 2010
LORAIN HAS $34.8 MILLION OF MOODY'S RATED POST-SALE GOLT DEBT
Moody's Rating ISSUE
Taxable General Obligation Health Benefit Claims Bonds, Series 2010 (Limited Tax) Sale Amount $5,000,000 Expected Sale Date 05/25/10 Rating Description General Obligation Limited Tax
NEW YORK, May 19, 2010 -- Moody's Investors Service has downgraded the city of Lorain's (OH) general obligation limited tax rating to A3 from A2 and removed the negative outlook, affecting $29.8 million of Moody's rated debt. Concurrently, Moody's has assigned the A3 rating to the city's $5 million of Taxable General Obligation Health Benefit Claims Bonds, Series 2010 (Limited Tax). While the bonds are secured by the city's general obligation limited tax pledge, subject to the ten mill limitation, annual debt service payments are expected to be paid by the General Fund (60% of debt service payments) and eleven other governmental funds, though the city retains the right to levy property taxes to pay debt service. The majority of the bond proceeds will be used to pay costs associated with the settlement of the city's health benefits claims for 2010, with approximately 15% going to pay health benefits claims for 2011. The downgrade to the A3 reflects the city's extremely pressured financial position that will likely remain pressured despite corrective actions to eliminate the city's negative cash deficit and the expectation that current challenges to the tax base and local economy are likely to persist over the near term. EXTREMELY PRESSURED FINANCIAL POSITION WITH LIMITED FLEXIBILITY; NEGATIVE BUDGETARY BASIS CASH POSITION IN FISCAL 2008 AND FISCAL 2009 We expect the city's financial operations will remain pressured despite corrective actions in fiscal 2010 to eliminate the city's deficit General Fund (budgetary basis) balance (-$2.6 million at fiscal 2009 year end) due to volatile primary operating revenue streams in the context of a local economy that remains challenged. The city was declared to be in a state of "fiscal watch" in October 2002 by the state auditor due to a budgetary basis cash deficit of $2.4 million, exceeding the threshold of one-twelfth of the prior year's revenues. Subsequently, based on recommendations of a performance audit from the state auditor, the city implemented a deficit reduction plan, which resulted in a moderately improved financial position between 2002 and 2007. On an accrual basis, the city's fiscal 2007 General Fund balance was $1.3 million, or a narrow 4.4%. However, starting in fiscal 2008, the city began to reverse the upward trend due to declining revenues coupled with one-time negative expenditure variances, yielding a $855,000 shortfall, reducing General Fund reserves to $470,000, or an extremely narrow 1.6% of General Fund reserves on an accrual basis. On a budgetary basis, the General Fund had a $1.4 million operating deficit at the end of fiscal 2008. The city planned to eliminate the budgetary basis fund deficit by the end of fiscal 2009, projecting a $1.5 million operating surplus that would yield a $320,000 General Fund balance at the end of year. Instead, the city saw an additional $1.4 million operating deficit, which grew the budgetary basis deficit to $2.6 million at the end of fiscal 2009. The unexpected deficit was caused by income tax revenues coming in $1.1 million below budget as well as shortfalls in interest income, local government funding, and property taxes. To stem further decline, the city eliminated 39 positions at the end of 2009 and the beginning of 2010, yielding an estimated $1 million in savings. Additionally, city council reduced the credit given to residents who work in other cities from a 100% credit to 50%, which is expected to yield an additional $1.5 million in revenues per year. In order to eliminate the entire deficit in 2010, the city also is issuing the current offering, the health care bonds, which will fully fund the city's estimated $4.4 million annual health care costs ($2.4 million from the General Fund) for 2010. Through these measures, the city expects to eliminate the budgetary basis deficit in 2010 and end the year with a General Fund balance of $25,000. While the city's year-to-date figures are currently on track to meet this goal, the city has budgeted a 2.2% increase in income tax receipts for the year, which may be overly ambitious, and also may face a $330,000 unbudgeted debt service payment on the city's 2003 and 2007 urban renewal bonds. A local developer is obligated to pay any shortfall in collections on urban renewal service payments and debt service, but failed to pay an estimated $138,000 on the bonds in 2009, which the city had to use General Fund revenues to pay. The developer has made a partial payment of $50,000 on the 2009 obligations, but still owes the remainder for 2009 and additional revenues for 2010, which the city's General Fund would need to pay if the developer does not. Going forward, the city's goal is to maintain structural balance and slowly build up its reserves through annual additions to the General Reserve Balance Fund. City officials have expressed a commitment to maintaining a balanced budget and enacting additional expenditure reductions if revenues fall short of expectations. In March 2010, city council passed an ordinance to establish a General Reserve Balance Fund and will add $25,000 to the fund in 2010. The city plans to add $250,000 per year after that, with the goal of building the reserve fund up to $1 million, or a narrow 3.7% of 2009 receipts over the next five years. Given this schedule, at the end of fiscal 2011, the city would have cash basis General Fund reserves of $275,000, or a still very limited 1% of 2009 General Fund receipts. Similar to most Ohio cities, Lorain is dependent on revenues from its municipal income tax, which accounted for a sizeable 54% of General Fund revenues in fiscal 2008. The city's vulnerability to income tax volatility is demonstrated by the closure of a Ford Motor Company (senior unsecured rated B3/ratings under review for possible upgrade) manufacturing facility in December 2005, which reduced the city's income tax by over $2 million (or 12% of 2005 General Fund income tax receipts). In order to offset the loss in its income tax base, the city successfully sought and achieved a 0.25% increase in the income tax rate. Favorably, this increase was reauthorized by more than 78% of voters in 2009. Nevertheless, income tax receipts have continued to decline,
falling more than 4% annually in fiscal 2007 and 2008, and nearly 12% in fiscal 2009. Even with the reduction in the income tax credit, estimated income tax receipts for 2010 are still 9.4% below 2006 receipts. The city is able to maintain cash flow by advancing money from the utility funds, which are self-supporting, and each saw rate increases in 2009 to continue to support debt service obligations and capital projects in those funds. The advances have all been repaid within the current year, and if projections hold and the city ends up eliminating its deficit in 2010, the city does not expect to borrow from other funds in 2011. We believe the city's current fiscal condition exacerbates its vulnerability to volatility in income tax receipts. Further deterioration in key revenues beyond budgeted levels in 2010 could exert pressure on the city's overall credit profile. Given the limited financial flexibility of the city at this time, we expect the city's financial position will remain pressured over the medium term. MANUFACTURING JOB LOSSES PRESSURE LOCAL ECONOMY; CITY REDEVELOPMENT EFFORTS FOCUSED ON RETAINING AND BUILDING EMPLOYMENT BASE We expect the city's local economy, which has been historically dependent upon durable goods and automotive manufacturing, will remain pressured given the current economic climate. More recently, the city's efforts to rebound from the loss of approximately 1,600 jobs following the December 2005 closure of a Ford manufacturing facility have been hindered by job losses at Republic Engineered Products and U.S. Steel Tubular Products (parent company senior unsecured Ba2/negative outlook), two local steel manufacturing facilities. To offset the loss of approximately 4.9% of the city's labor force due to the Ford plant closure and a weak overall economic environment, city officials have worked to retain and attract employers by creating urban renewal zones, maintaining investments in infrastructure and providing income and property tax abatements. Industrial Realty Group (IRG) acquired the former Ford facility in 2006 and has refurbished portions of it, attracting several distribution and warehouse companies to the site, generating approximately 100 new permanent jobs and 75 seasonal jobs. Approximately 20% of the 225 acre site is occupied and the city recently received a grant to tear down the former paint shop. The city's moderately sized $2.6 million tax base has exhibited modest average annual declines of 1.2% over the last five years, due in part to the state of Ohio's (GO rated Aa1/negative outlook) complete phase out of its tangible personal property tax between 2006 and 2009. Resident income levels lag state and national norms, with a per capita and median family income equivalent to 75.7% and 78.8% of national figures, respectively. The city still retains a significant degree of concentration in its income tax base, with four employers making up nearly 30% of the city's income tax revenues. The top two employers, Community Health Partners (Catholic Health Partners rated A1/stable outlook), and Lorain City School District, are relatively stable entities. Community Health Partners represents 9.6% of the income tax base with 1,629 employees and the school district is 8.7% with 1,022 employees. The next two top employers, however, are both steel manufacturers and have had a degree of volatility in their operations over the last few years. United States Steel Tubular Products (6.2% of the base, 523 employees) laid off approximately 77 employees in 2009, though city officials report that all of these employees have been called back and the company recently announced it would make a $250 million investment in the plant. Republic Engineered Products (5% of the base, 400 employees) has implemented substantial layoffs since 2008 when it employed as many as 1,100 individuals. Unemployment rates are higher than the state and nation, due to 2009 layoffs and challenges related to the city's auto and steel presence, with a 12.8% February 2010 unemployment, exceeding the state (11.8%) and national (10.4%) figures for the same time period. MODERATE DEBT BURDEN WITH SOME ADDITIONAL BORROWING PLANS We anticipate the city's overall debt burden of 3.2% (1.4% direct) will remain moderate, despite the city's below average principal amortization rate (54.5% retired within ten years), given limited future borrowing plans. The city plans to issue $500,000 in special assessment debt later this year for road projects and up to $3 million for a project at the Lighthouse Village shopping center, that would be repaid from tax increment revenues. Favorably, the city funds approximately half of its outstanding obligations from non property tax revenue sources (including special assessments, tax increment, and utility revenues), reducing the burden on taxpayers. Bond anticipation notes make up 5.8% of the city's outstanding debt, exposing the city to modest market access risk. The city plans to roll the current outstanding notes into new notes when they mature in September 2010. All of the city's outstanding debt is in fixed rate mode, and the city is not a party to any interest rate swap agreements. KEY STATISTICS: 2000 Population: 68,652 (3.6% decrease since 1990) 2010 Full market valuation: $2.6 billion (1.2% average annual decrease since 2005) Estimated full value per capita: $37,513 Per capita income as % of U.S. (1999): 75.7% Median family income as % of U.S. (1999): 78.8% City unemployment rate (February 2010): 12.8% FY2008 General Fund balance (accrual basis): $470,000 (1.6% of General Fund revenues) FY2008 General Fund cash balance: -$1.5 million (-4.8% of General Fund receipts) Debt burden: 3.2% (1.4% direct) Post-sale short-term general obligation limited tax debt outstanding: $2.2 million Post-sale long-term general obligation limited tax debt outstanding: $35.9 million PRINCIPAL METHODOLOGY AND LAST RATING ACTION The principal methodology used in rating the city of Lorain (OH) was Moody's General Obligation Bonds Issued by U.S. Local Governments, published in October 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
The last rating action and report published with respect to the city of Lorain (OH) was on July 27, 2009 when the city's Baa2 GOLT rating with negative outlook was affirmed. That rating was subsequently recalibrated to A2 with negative outlook on April 23, 2010.
Emily Robare Analyst Public Finance Group Moody's Investors Service Henrietta Chang Backup Analyst Public Finance Group Moody's Investors Service
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