Fitch Affirms Cumberland, MD's GOs at 'A'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the 'A' rating assigned to Cumberland MD's $21.1 million outstanding general obligation bonds listed below.

The Rating Outlook is Negative.

SECURITY

The bonds are secured by the city's full faith, credit and taxing power.

KEY RATING DRIVERS

WEAKENED FINANCIAL POSITION

The city's fiscal condition has weakened in recent years. City finances have seen multi-year operating deficits, negative unreserved ending fund balances, and tightening of liquidity.

BELOW-AVERAGE ECONOMY

The city's wealth levels are below average. Population has been declining and unemployment is above state levels.

MODERATE DEBT LEVELS

City debt levels are moderate, with over 60% of debt amortized within 10 years.

WHAT COULD TRIGGER A RATING ACTION

LACK OF FINANCIAL IMPROVEMENT: The inability of the city to produce audited fiscal 2011 results consistent with or better than unaudited figures and/or lack of continued improvement in its liquidity or fund balance levels in fiscal 2012 will likely cause a downgrade.

CREDIT PROFILE

FINANCIAL DETERIORATION IN RECENT YEARS

City finances have deteriorated in recent years due to property tax rate cuts earlier in the last decade, economic slowing, increased property tax delinquencies, cuts in state funding and a lack of conservative budgeting. The city's general fund balance has typically been maintained at a low level, with unrestricted assets from the enterprise systems transferred to the general fund, contributing to the city's overall financial health.

Audited fiscal 2010 results mark the third consecutive year of negative unreserved general fund ending balances, growing to negative $1.9 million or (10.3%) of general fund spending. Unaudited fiscal 2011 results show another negative unreserved ending balance but if audited results prove consistent with estimates, the city's deficit position will improve for fiscal 2011.

The city continues to rely on profit transfers from its regional water and sewer system (the utility system) to balance general fund operations. For fiscal 2011, the city transferred 100% of the utility system's net profits ($990.9 thousand or about 6% total general fund revenues) to the general fund.

Based on preliminary figures, combined water/sewer fund unrestricted net assets increased in fiscal year 2011. The increase reflected growth in water fund net assets (from $1.1 million in fiscal year 2010 to $1.7 million in fiscal year 2011) and a decline in sewer fund net assets (from $128 thousand to a deficit of $445 thousand). Sewer fund finances were affected by greater than expected operations costs associated with a new Enhanced Nutrient Removal (ENR) Waste Water Treatment Plant. The city increased rates by 13% for fiscal year 2012 to address increased needs. The continued sound financial performance of the utility system is an important credit consideration.

FINANCES BENEFIT FROM DEBT RESTRUCTURING, IMPROVED TAX COLLECTIONS

The city made significant expenditure reductions for fiscal year 2011 in an attempt to balance the general fund budget, and additional expenditure reductions (10% cuts to department spending, limits on capital acquisitions and improvements) are included in the fiscal year 2012 budget. The fiscal year 2012 budget includes an ending general fund surplus of $210,846. The water and sewer fund budgets are also expected to end the year with surpluses.

The general fund ending balance projection does not reflect expected fiscal year 2012 savings of $3.7 million from a debt restructuring earlier this year. Via debt issuance through the Maryland Department of Housing and Community Development, Community Development Administration, the city was able to restructure outstanding general obligation debt for savings of $5.5 million over the first five years, $3.7 million of which will be realized in fiscal year 2012.

The restructuring pushed debt service into outer years for near-term savings, but did not extend maturities. Overall, debt service will increase by $2.4 million over the life of the bonds, maturing in fiscal year 2032. The city is targeting savings from the restructuring towards rebuilding reserves. While Fitch generally views debt restructuring for operational needs as a credit negative, it is not inconsistent with the below-average 'A' rating level.

After declines in recent years, the city is seeing an improvement in tax collection due to more aggressive pursuit of delinquent taxpayers and a tax amnesty program. From fiscal year 2010 to fiscal year 2011, receivables were reduced to $1.1 million (unaudited) from $1.9 million.

TIGHT BUT IMPROVING LIQUIDITY

The expected savings from the restructuring will also strengthen the city's cash position, though a portion of the savings will go towards repayment of internal borrowing. Liquidity has always been minimal in the general fund, partially attributable to the city's practice of pooling its cash, exacerbated over the last few years by operating deficits. The city has relied on increasing tax anticipation notes (TAN) issuance, up from about $2 million annually to $4 million in fiscal year 2011.

As a preliminary sign of improvement for fiscal 2012, the city does not plan on issuing TANs. While general fund cash flow will benefit from recently enacted legislation permitting further borrowing from previously unavailable internal sources (the Street Improvement Fund) in the amount of $750 thousand, the level of short-term needs is below that of 2011. In fiscal year 2011, borrowing included $4 million from TAN issuances and another $1.5 million from internal sources.

BELOW-AVERAGE ECONOMY AND DEMOGRAPHICS

Cumberland, the county seat of Allegany County, is located in northwestern Maryland, approximately 130 miles between both Pittsburgh, Pennsylvania and Baltimore, MD. The city's population has declined by about 3% since the 2000 census to approximately 20,859 residents in 2010, a trend that follows a 9% decline in population during the 1990s.

The unemployment rate for Allegany County, a close proxy, was 8.4% in September 2011, remaining below the comparable national average (8.8%) but above that of the state (7.2%). While Cumberland's local economy was historically based on manufacturing, the health care industry has added some depth to the employment base in recent years. Wealth levels in the city are considerably below average relative to the state and the nation.

Overall debt levels are moderate at approximately 3.2% of market value for real property in fiscal 2010. Amortization is average, with over 60% of principal being retired in the next 10 years. No long-term debt is currently planned although the city's utility system is under a consent order with which it needs to comply by fiscal year 2022. The city is working on the project with the state, and city expects that the state will continue to provide funding. If the state were not able to provide adequate funding, the city may need to issue additional debt to address the order.

Specific Series Rated by Fitch Ratings:

--$646 thousand Merchant's Alley Public Improvement Bonds, Series 2002;

--$4.7 million Pension Contribution Bonds (Taxable) Series 2009;

--$9.1 million Public Improvement Bonds Series 2008;

--$25.3 thousand Sewer Fund Bonds Series 1991B;

--$2.8 million Sewer Fund Bonds Series 1999;

--$278.7 thousand Water Fund Bonds Series 1999;

--$3.6 million Water Fund Bonds Series 2001.

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 the 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.

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', dated Aug. 15, 2011.

'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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