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MOODY'S ASSIGNS MIG 1 RATING TO CITY OF KIRTLAND'S (OH) $2.33 MILLION VARIOUS PURPOSE (GOLT) BOND ANTICIPATION NOTES, SERIES 2011

07 Jul 2011

AFFIRMS A1 RATING ON $3.2 MILLION OF OUTSTANDING GOLT DEBT

Municipality
OH

Moody's Rating

ISSUE

RATING

Various Purpose (General Limited Tax) Bond Anticipation Notes, Series 2011

MIG 1

  Sale Amount

$2,325,000

  Expected Sale Date

07/12/11

  Rating Description

Bond Anticipation Notes

 

Opinion

NEW YORK, Jul 7, 2011 -- Moody's Investors Service has assigned a MIG 1 rating to the City of Kirtland's (OH) $2.33 million Various Purpose (General Limited Tax) Bond Anticipation Notes, Series 2011. Concurrently, Moody's has affirmed the A1 rating on the city's general obligation limited tax debt, affecting $3.3 million.

SUMMARY RATINGS RATIONALE

The notes are secured by the city's general obligation limited tax pledge, subject to the ten mill limitation. Proceeds of the notes will be used to refund the city's Various Purpose Bond Anticipation Notes, Series 2010 which mature on July 21, 2011 and were originally used to finance sewer and road improvements and equipment purchases. Additionally, $110,000 in cash on hand will be used to retire the Series 2010 notes and the city is adding $75,000 in new money to the notes for equipment purchases. The notes mature in one year and the MIG 1 rating is based on expected market access for the take out refinancing, a history of successful marketing of bonds and notes, and the credit quality reflected in the city's A1 GOLT rating. Affirmation of the A1 rating reflects the city's wealthy, suburban Cleveland (GO rated A1/stable outlook) tax base; narrow, yet improving, financial operations; and favorable debt profile with no future borrowing expected.

STRENGTHS

- Expected tax base growth over medium term due to significant sewer expansion in city

- Above average income indices

CHALLENGES

- Significant concentration in income tax base, mitigated somewhat by stability of top income taxpayers

- Relatively narrow financial reserves, providing limited cushion in the case of unexpected budgetary variances

DETAILED CREDIT DISCUSSION

EXPECTED MARKET ACCESS FOR REFINANCING

The city's demonstrated ability to access the market includes two sales for notes in the last two years through negotiated sales. The city plans to roll the current issuance into another series of notes before it matures July 19, 2012. The current notes are refinancing notes that mature on July 21, 2011, with an expected sale date of July 12, 2011, adequately in advance of the maturity date. Many Ohio cities keep a portion of their debt in notes in order to access more favorable short-term rates and to allow for flexibility to pay down principal upon annual renewal of the notes. City management is expected to make adequate provisions to address potential market disruptions at the time of the takeout financing by planning to take out debt well in advance of final maturity and considering alternate back up plans if necessary.

WEALTHY, SUBURBAN CLEVELAND TAX BASE EXPECTING GROWTH THROUGH SEWER SYSTEM EXPANSIONS

We anticipate that the city's modestly-sized $729 million tax base will exhibit modest growth as its sewer system expansion is completed due to its favorable location in suburban Lake County (GO rated Aa1) in the Cleveland metropolitan area. Approximately one-third of the city's land is residential, one-third is occupied by parks and Lakeland Community College (12,000 full-time and part-time students), and one-third remains available for development with the majority zoned for low-density, high-value residential construction. Following strong growth earlier in the last decade, the city saw a 7.7% decline in value during its triennial update year in 2010 attributed to declining home values. Commercial development has been modest, in part due to a lack of sanitary sewers throughout the city limits. Historically only the community college was on the county sewer system, with the remainder of the city on septic systems. Due to an Ohio Environmental Protection Agency consent decree, the city is working with the county to extend county sanitary sewer lines to its Temple View subdivision and approximately two miles along State Route 306, the city's business district. The city has begun to see some new development due to the sewer expansion, with construction of Holden University Center, which is expected to open in the fall 2011. The building is owned by a private developer, though leased by Lakeland Community College and will provide students the opportunity to take classes from ten different regional universities at the center. City officials expect to see additional commercial development in the business district following completion of the sewer system extension in 2011. Unemployment in Lake County, at 7% in April 2011, is favorably lower than both the state (8.4%) and national (8.7%) rates for the same time period. Income indices exceed both state and national medians with per capita income at 148.9% of the nation in the 2000 census and median family income at 152%.

FINANCIAL OPERATIONS CHARACTERIZED BY NARROW BUT IMPROVING RESERVE LEVELS

We expect the city's financial operations will remain satisfactory in the near term due to expenditure reductions, growth in income tax receipts, and passage of a replacement fire levy. The city experienced solid growth in fiscal 2009, growing reserves from $378,000, or a limited 7.8% of revenues, at the end of fiscal 2008 to a still narrow, but improving, $633,000, or 13.3% of General Fund revenues at the end of fiscal 2009. We note that this amount is significantly improved over unaudited 2009 results reported in last year's credit review (which indicated a 2009 ending balance of $364,000, or 7.6% of revenues) due to a change in the recording of long-term bond anticipation note liabilities on the financial statements. The fund balance growth in 2009 was due to expenditure reductions such as reductions in employment through attrition and less overtime, as well as revenue enhancements. In 2008, voters authorized a replacement fire services levy, effective in fiscal 2009, which increased funds for fire services by approximately $300,000. In fiscal 2010, unaudited results show a modest operating surplus, growing General Fund reserves to $660,000, or 14% of revenues. The city carries limited reserves in its Fire Fund, and combined fiscal 2010 General and Fire Fund reserves were $684,000, or an adequate 12.4% of combined revenues. On a cash basis, the city had approximately $331,000 in the General Fund at the close of fiscal 2010, with approximately $636,000 in cash in all of its discretionary funds (which includes the General Fund, police and fire funds, senior citizens fund, and several smaller funds). The city manages its finances to maintain a minimum of $500,000 in reserves across all these funds and has a goal of increasing reserves to $1 million over the medium to long term.

For fiscal 2011, officials report that income tax receipts are slightly up over fiscal 2010, and the city expects the General Fund balance to remain relatively flat with fiscal 2010. The state recently finalized its biennium fiscal 2012 and 2013 budget, which could lead to a loss of approximately $250,000 in local government funding for the city in fiscal 2012. The city expects projected growth in income tax receipts will make up a portion of this revenue loss, and officials are currently evaluating other revenue items that could be used to offset the decline if necessary. Revenue options include additional property tax levies dedicated to fire, police, or road services or an admissions tax to be levied on events held in city parks. Additionally, Kirtland's income tax rate is currently 2%, and the city offers an income tax credit on up to 1.75% to residents who pay an income tax to another city. City council could decrease the income tax credit, with each 0.25% reduction expected to generate an estimated $280,000 in additional revenues. The city's income tax is its largest revenue source, at 53.2% of 2010 General and Fire Fund operations. The city has significant concentration in its income tax base with its top six employers making up a substantial 40% of income tax collections, though we note that all six are relatively stable entities, mitigating the risk posed by this concentration. Lakeland Community College is the city's top employer with approximately 700 employees and represents a significant 25% of income tax collections for the city. The local school district makes up 5% of collections, and the remaining 10% of the top six includes a nursing home, the city itself, a metro park, and the arboretum. Future credit reviews will continue to focus on management's ability to retain and build current reserve levels in order to manage the risk posed by the strong reliance on income tax receipts and significant concentration in income taxpayers.

MANAGEABLE DEBT PROFILE; NO FUTURE BORROWING PLANNED

The city's debt profile is expected to remain manageable as the city has no major capital needs in its five-year capital improvement plan. The city currently plans to cover any upcoming capital needs using cash on hand. Principal amortization is average with 68.7% of principal retired within ten years. The city's overall debt burden at 2.5% of full valuation and direct debt burden at 0.8% are both below average. Notes make up 40% of the city's total debt burden, exposing the city to moderate market access risk. All of the city's existing long-term debt is fixed rate, and the city is not a party to any interest rate swaps.

What could make the rating go - UP

- Expansion of tax base

- Significant expansion of financial reserve levels

What could make the rating go - DOWN

- Deterioration of tax base and/or demographic profile

- Material declines in General Fund reserve levels

KEY STATISTICS:

2010 Population: 6,866 (2.9% increase since 2000)

2011 Estimated full market valuation: $729 million (1.4% average annual increase since 2005)

Estimated full value per capita: $106,154

Per capita income as % of U.S. (1999): 148.9%

Median family income as % of U.S. (1999): 152%

Lake County unemployment rate (April 2011): 7.0%

FY2009 General Fund balance: $633,000 (13.3% of revenues)

FY2010 Unaudited General Fund balance: $660,000 (14% of revenues)

FY2010 Unaudited Combined General and Fire Fund balances: $684,000 (12.4% of revenues)

Debt burden: 2.5% (0.8% direct)

Principal retirement (10 years): 68.7%

Post-sale long-term general obligation limited tax debt: $3.2 million

Post-sale short-term debt: $2.33 million

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Bond Anticipation Notes and Other Short-Term Capital Financings, published in May 2007. Please see the Credit Policy page on www.moodys.com for a copy of this methodology .

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Emily Robare
Analyst
Public Finance Group
Moody's Investors Service

Henrietta Chang
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS MIG 1 RATING TO CITY OF KIRTLAND'S (OH) $2.33 MILLION VARIOUS PURPOSE (GOLT) BOND ANTICIPATION NOTES, SERIES 2011
No Related Data.
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