Fitch Affirms Beachwood, Ohio's LTGOs at 'AAA'; Outlook Stable
Fitch Ratings has affirmed the following Beachwood, Ohio (the city) bonds:
--$335,000 limited tax general obligation (LTGO) street and sewer improvement bonds series 2000 at 'AAA';
--$7.1 million LTGO municipal complex improvement bonds series 2004 at 'AAA'.
In addition, Fitch assigns an 'AAA' implied unlimited tax general obligation rating.
The Rating Outlook is Stable.
The bonds are secured by the city's full faith and credit and ad valorem tax subject to the 9.2-mill limitation.
KEY RATING DRIVERS
STRONG MANAGEMENT AND RESERVES: Prudent financial management has historically resulted in high reserve levels.
DYNAMIC ECONOMY: The city's strong and diverse economic base benefits from its location near Cleveland, which provides abundant employment opportunities to supplement those offered within the city. Economic development has been strong.
SIZEABLE DEBT PROFILE: High overall debt levels are partially offset by rapid amortization and limited future capital needs. Pension and other post-employment benefits (OPEB) are manageable.
NO RATING DISTINCTION: Fitch makes no rating distinction between the implied ULTGO and LTGO ratings due to the financial flexibility offered by the city's high reserve levels and ample taxing margin.
Located approximately 13 miles from downtown Cleveland, Beachwood lies in Cuyahuga County (Fitch unlimited tax GO rating 'AAA'; Outlook Stable). The city's proximity to Cleveland and major transportation routes have fostered its development as a regional retail and office center for the eastern Cleveland suburbs.
BROAD, STABLE ECONOMY
The city's broad economic base is led by a major facility of Bank of America and the Cleveland Clinic Foundation. Despite the economic downturn, the city managed to attract additional business investment. In 2012, the city began receiving significant income taxes from the Ajuha Hospital (University Hospital System). Next February, the city anticipates completion of the Eaton Corporation headquarters construction project, which is estimated to house approximately 750 to 1,000 employees and possibly even more over the next several years.
The city's socioeconomic indicators are healthy, with a median household income 152% and 139% of state and national averages, respectively. Cuyahuga County's September 2012 unemployment rate of 6.9% was higher than the state average of 6.5%, but lower than the national average of 7.6%; however, given Beachwood's demographics, its unemployment rate is likely much lower than the county's.
Taxpayer concentration is high, with the top 10 taxpayers comprising approximately 29% of assessed value. Fitch takes comfort from the fact that two of the top three taxpayers are based in the healthcare sector (University Hospital System and the Cleveland Clinic Foundation), which provides a stabilizing presence to the city's tax base.
Following two years of deficits, the city closed 2011 operations with a general fund surplus of $5.7 million, increasing the unrestricted fund balance (the sum of committed, assigned and unassigned per GASB 54) to $22.9 million, equal to a strong 77% of general fund spending. The surplus was achieved in part through a permanent, voter-approved 0.5% increase in the city's income tax rate to the maximum rate of 2%. This increase was necessary due to declines in income tax receipts due to the recession as well as the state's elimination of the estate tax effective January 1, 2013.
The 2012 budget calls for a 2.9% decrease in general fund revenue to $35.4 million. The decline in 2012 revenue is driven by conservative budgeting for estate taxes. The city is budgeting $2.2 million in estate taxes (6% of general fund revenue), compared to actual receipts of $3.5 million (9% of general fund revenue) in 2011. Fitch anticipates that the loss of estate tax revenue will be offset by the increase in the income tax rate combined with economic development soon to come online, including the Eaton Corporation headquarters project.
Management indicates unaudited projections for fiscal 2012 show a surplus of $3.5 million resulting in an ending unrestricted general fund balance of $22.5 million on a cash basis, equal to a strong 67% of budgeted 2012 spending. The city had budgeted for a larger drawdown in fund balance, but, through positive revenue collections and conservative budgeting, actuals will be better than budget.
The city's policy is to maintain a general fund balance equal to 50% of general fund expenditures, and the city expects to sustain this level throughout its seven-year forecast. Fitch believes this is a reasonable assumption given the city's history of conservative budgeting, the increase in the income tax rate, the general expansion of the city's commercial base coupled with manageable expenditure growth pressures. The city retains flexibility to decrease expenditures if necessary, including delaying capital improvements and reducing wage and benefits costs through attrition.
ABOVE AVERAGE DEBT PROFILE
Overall debt levels are high, at $6,301 per capita and 7% of market value, largely due to overlapping school debt. Direct debt levels are more moderate, at $2,154 per capita and 2.4% of market value. Amortization is very rapid with 83% retired in 10 years. Capital needs are minimal. The debt service burden is moderate at 7.1% of general fund and debt service fund spending in 2011.
The city contributes to the Ohio Public Employees Retirement System (OPERS) and the Ohio Police and Fire Pension Fund (OP&F) to fund both pension and OPEB. Both OPERS and OP&F are cost-sharing, multiple-employer defined benefit pension plans. The city historically fully funds its required contributions to both pension funds, and the city contributed 100% of the required contribution for 2011.
The city's contributions to OPERS and OP&F equaled 6.2% of 2011 spending. Carrying costs for debt service, pension and OPEB equaled a manageable 13.9% of 2011 spending.
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
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