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MOODY'S ASSIGNS MIG 1 RATING TO CITY OF TOLEDO'S (OH) $14.15 MILLION CAPITAL IMPROVEMENT NOTES, SERIES 2010-2

13 Oct 2010

AFFIRMS A2 RATING AND STABLE OUTLOOK ON $160.8 MILLION OF OUTSTANDING LONG-TERM GOLT DEBT

Municipality
OH

Moody's Rating

ISSUE

RATING

Capital Improvement Notes, Series 2010-2 (General Obligation Limited Tax Bond Anticipation Notes)

MIG 1

  Sale Amount

$14,150,000

  Expected Sale Date

10/14/10

  Rating Description

Bond Anticipation Note

 

Opinion

NEW YORK, Oct 13, 2010 -- Moody's has assigned a MIG 1 rating to the City of Toledo's (OH) $14.15 million capital Improvement Notes, Series 2010-2 General Obligation Bond Anticipation Notes (Limited Tax Bonds). Concurrently, we have affirmed the A2 rating and stable outlook on $160.8 million of outstanding long-term general obligation debt.

RATINGS RATIONALE

The MIG 1 rating is based on expected ability to take out the notes at maturity through market access or alternate plans, a history of successful marketing of notes as bonds, and the credit quality reflected in the city's A2 rating and stable outlook. The A2 rating reflects the city's pressured financial position due to substantial negative revenue variances that led to a deficit General Fund position at the close of fiscal 2009; large tax base featuring a sluggish local economy that could continue to face challenges associated with exposure to the domestic automotive sector and weak demographic trends including population loss and high unemployment; and healthy debt position that benefits from conservative management. The stable outlook reflects our expectation the city will replenish the General Fund balance in the current fiscal year and successfully maintain balanced operations, allowing the city to begin rebuilding reserves over time. Additionally, Toledo's economy is expected to continue to benefit from the stabilizing presence of the healthcare and higher education sectors as well as continued diversification from its historic dependence on heavy manufacturing.

EXPECTED MARKET ACCESS

Toledo's demonstrated ability to access the market includes sales for annual and semi-annual note issuances annually for the past 20 years through competitive, and more recently negotiated, sales. The Series 2010-2 notes will refinance, along with $100,000 of cash, the city's Series 2010-1 notes that mature on October 28, 2010 with an expected sale date of October 14, 2010, sufficiently in advance of the maturity date. The current offering does not include any new financing. Authorization for the take out financing is based on the original authorizing resolution, allowing the city to roll the notes, or issue long-term debt. 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. Under Ohio statute, the city must begin paying down principal on rollover notes by the fifth year following initial issuance. Principal is to be paid down annually in amounts equal to that which would have been paid if bonds had been issued after the fifth year, with a maximum maturity of 20 years past the fifth renewal of the notes. The notes are backed by the city's general obligation limited tax pledge, subject to the 10-mill limitation. City management is expected to make adequate provisions to address potential market disruptions at the time of the takeout financing, by planning the take out debt well in advance of final maturity, and considering alternate back up plans if necessary. Favorably, Toledo maintains sufficient liquidity in the Capital Projects Fund (unreserved balance of $18.9 million at the close of fiscal 2009) to retire the current note issue with cash on hand should a market disruption occur.

FINANCIAL POSITION SHOWING SIGNS OF STABILIZATION AFTER DEPLETION OF RESERVES IN 2009, BUDGETARY CHALLENGES PERSIST

While we recognized that the city had made important steps towards stabilizing financial operations in FY2006 and FY2007, subsequent economic events posed unanticipated revenue challenges that yielded substantial operating shortfalls in FY2008 and FY2009. Having suffered sizeable operating deficits in FY2001 through FY2004, the city's financial position had narrowed to a level that provided little management flexibility and budgetary cushion. Reserves stabilized in recent years as the city made a concerted effort to shore up budgetary reserves. FY2007 resulted in a $1.5 million surplus, bringing General Fund reserves to $12.3 million, or a still narrow 5% of General Fund revenues. Through FY2007, income tax receipts made modest gains, with the five year average annual increase at 2%, a trend that seemed to be holding through the second quarter of FY2008. However, third and fourth quarter results lagged significantly, and by December 2008 an $8 million General Fund shortfall was projected. Full year collections in FY2008 reflected a sizeable 9% decline from FY2007 collections, or over a $12 million shortfall from budgeted income tax revenues. This was followed by a 8.4% decline in FY2008, a larger decline than even the substantial 6.1% decline included in the budget.

The city's revenue pressures in FY2008 and FY2009 were largely related to the faltering local employment base and its impact on the city's primary revenue source - a 2.25% local income tax. The second half of FY2008 saw unplanned idling at the Jeep and GM Powertrain facilities. Bankruptcy proceedings and general uncertainty surrounding continued operations in early 2009 prolonged the revenue pressures. Both facilities are among the top ten income tax producers for the city and also drive employment trends at various related suppliers. Nearly three-fourths of the city's income tax is dedicated to General Fund operations, representing nearly 70% of total General Fund revenues, with the balance dedicated to capital projects. Any volatility in this revenue stream has a significant impact on the city's year to year operations, which is typical of most Ohio cities.

While officials were able to implement some one-time budgetary offsets in both FY2008 and FY2009, the General Fund reserve fell dramatically in both years - $8 million in FY2008 and $13.3 million in FY2009 - bringing reserves to a negative $9.1 million, or an extremely pressured 4.1% of revenues, for FY2009. We note that these figures do not include an additional source of $9.7 million in the form of a general obligation bond anticipation note for solid waste collection equipment.

The city's Budget Stabilization Reserve, as defined by a 1999 policy, is typically funded by an application of 50% of any annual General Fund operating surplus and a portion of investment income. Accumulated reserves designated for budget stabilization can only be utilized by a two-thirds approval of city council. While the city's recent budgetary pressures have also depleted the Budget Stabilization Reserve, this policy provides a basis for fiscal discipline in replenishing reserves over time. Favorably, management expects 25% of annual casino revenues that will begin collection in 2012 will be allocated toward restoration of the Budget Stabilization Fund.

Management identified an estimated $31 million budget gap for FY2010, including the carryover deficit from FY2009. The FY2010 budget was balanced in part by a combination of revenue enhancements and expenditure reductions aimed to stabilize the city's fiscal position. Notably, the city implemented a $15 increase in the monthly refuse collection fee and reduced the income tax credit to 75% from 100%. These revenue enhancements were initially expected to generate $11 million and $2 million, respectively, in the current fiscal year. On May 4, 2010 residents authorized a referendum allowing the city to reallocate a portion of the city's 0.75% temporary income tax from capital to operating costs between July 2010 and December 2012, allowing $7 million in additional revenue to flow to the General Fund in FY2010. Though this measure will improve short-term financial flexibility, we believe it is less favorable that management has opted to use this revenue to offset other recurring revenue enhancements that had been previously implemented - a portion of a garbage collection fee increase and a reduction in the 100% resident income tax credit. Other revenue enhancements including in the FY2010 have also been successful, including increased delinquent income tax collection efforts, netting approximately $3.5 million year to date.

The FY2010 budget also included series of expenditure reductions totaling $9.7 million in FY2010, including $3.1 million in negotiated concessions from Local 92 which represents the city's firefighters. Some of these reductions and concessions were restored from funding from the reallocation of the income tax. However, the city believes that ultimately, other offsetting savings and positive budget variances will allow it to achieve the ultimate goal of a balanced budget for the year, and returning the General Fund balance to a net zero position. Of particular note is that year to date, income tax collections are showing a slight flat to positive trend, compared to a 2.4% decline included in the original budget. However, we do believe that the continued negotiation of concessions and reversal of those concessions throughout the fiscal year may suggest future constraints in negotiating any concessions as means to maintaining structural balance.

While the city has yet to address its FY2011 budget, officials are committed to maintaining structural balance and we would expect General Fund reserves to remain stable, or increase slightly. We note that the voter approval for the city to utilize its ¾% capital income tax rate for operations affords up to $15 million of additional revenues available for operations if necessary. We will continue to closely monitor Toledo's financial performance as the city's ability to stabilize financial operations in the current fiscal year will be critical to our assessment overall analysis of credit quality.

CITY'S ECONOMY CHALLENGED BY DOWNTURN AND JOB LOSSES; THOUGH LONG-TERM STABILITY SUPPORTED BY ROLE AS ECONOMIC HUB

Despite economic challenges in the near and medium-term, we expect Toledo to maintain a level of economic stability over the long-term due to its role as an economic hub in northwest Ohio (GO rated Aa1/negative outlook) as the region continues to diversify and reduce its dependence on traditional manufacturing industries. The city's estimated full valuation, which stands at a relatively sizeable $10.7 billion, averaged an annual net decline of 3.3% over the last five years, including a 2007 sexennial reappraisal and a 2010 triennial adjustment. This decline reflects state reductions in the valuation of utility personal property and the phase out of tangible personal property values, as well as substantial declines in real estate valuation due to pressures in the residential housing market. While this has limited impact on the city's financial operations, real tax base declines reflect overall contraction in the city's economy.

Though the city has made progress in diversifying its employment base, it has remained dependent on a considerable manufacturing presence, particularly Chrysler's Jeep Corporation (the city's second largest manufacturing employer). Prior to entering bankruptcy in April 2009, Chrysler employed 1,700 employees at the Toledo North Plant and 1,300 at the Toledo Machine Plant. After emerging from bankruptcy, employment at these facilities stands at 1,500 and 770, respectively, though officials note there has been no layoffs at the Jeep facilities since May 2009. GM entered bankruptcy in June 2009, laying off over 1,000 employees at the Toledo Powertrain facility; however, 900 were recalled to work beginning July 2009 and officials indicate employment at this facility now stands at slightly more than 1,400. Following its bankruptcy reorganization, General Motors has recently been assigned a Ba2 Corporate Family Rating from Moody's. Operations for the automakers appear to have stabilized for the near-term although the long-term prognosis is still unclear, particularly noting that current employment levels remain below historic highs. The city remains in constant dialogue with Chrysler and GM local union officials to keep up to date with any planned changes in employment levels. It is also important to note that the health of the auto manufacturers directly impacts employment at various suppliers in the region, which officials estimate employee approximately 1,000 individuals.

The long-term decline of heavy manufacturing concerns have put overall pressure on the economy, contributing to negative factors such as population decline and above average unemployment rates. While the city's unemployment rate has declined to 11.9% as of August 2010 (compared to a 13% annual rate for 2009), they remain in excess of state and national figures (9.7% and 9.5%, respectively). Notably, the total labor force has also declined by approximately 6.4% over the past five years. Socioeconomic indicators from 2000 census data lag state and national norms, with per capita and median family incomes equivalent to 82.2% and 82.3% of national figures, respectively. Estimated full valuation per capita is a similarly modest $36,461. Population decline continues with census estimates from 2008 indicating a decline to 293,201 residents (or a sizable 6.5%) between 2000 and 2008.

Toledo continues to engage in various economic development efforts, recently cooperating with neighboring municipalities to jointly attract and retain businesses by sharing in resulting income tax revenues. Further, the city continues to invest in downtown redevelopment, noting an uptick in economic activity resulting from the recent completion of a minor league hockey arena and entertainment facility. Officials also seek to leverage the city's favorable location as a key transportation hub, receiving federal and state support to develop an intermodal facility. Favorably, Toledo is one of four Ohio cities authorized to construct a casino per a voter referendum approved in November 2009. Construction of the $250 million casino began in August of this year and is estimated to generate an estimated 800 jobs during the entire construction period. The presence of the University of Toledo (revenue debt rated A1 with a stable outlook; 6,025 employees) also provides institutional stability that has been further enhanced by the recent merger with the Medical College. Over the long-term the city looks to its key institutions, including higher education and health care providers, including ProMedica (revenue debt rated Aa3/stable outlook; 9,945 employees) and Mercy Health Partners (part of Catholic Health Partners, rated A1/stable outlook; 6,625 employees) to stabilize its economy, as well as new industries, particularly in alternate fuel development, to drive future growth. We believe the city has made some progress in stabilizing its economy, though a prolonged recession could have significant negative impacts for Toledo.

AVERAGE DEBT BURDEN EXPECTED TO REMAIN MANAGEABLE DUE TO CONSERVATIVE DEBT POLICIES

The city's above average debt burden of 4.4% (2.2% direct) will likely remain manageable due to rapid debt amortization (79.3% of principal retired in ten years) and the use of income tax revenues to fund capital projects. The city maintains a strict debt policy that mandates rapid payout and limits on leveraging of its tax base and other debt service supporting revenue streams. Approximately one-fourth of the city's income taxes are designated to fund capital projects, including repayment of debt service. The city's issuance of debt against this and other revenue streams is strictly limited by specific policies, ensuring the availability of these revenues for repayment of debt.

City officials do not anticipate significant borrowing for the water and sewer utilities in 2010, however the sewer utility will continue to address a $450 million EPA consent decree settlement over the next fifteen years. Additional borrowing over the next several years should not adversely impact the city's general obligation debt position as debt service is secured by net revenues of the enterprise systems. City council has authorized annual rate increases through 2010 and has the authority to increase rates as needed. New tax-backed debt issuances are planned, but are expected to remain manageable given the city's self-imposed limits. Toledo has 8.5% of its general obligation limited tax debt in short-term notes, which is below average resulting in modest exposure to market access risk. We expect the city to continue to manage its market access needs as it has historically.

Outlook

The assignment of a stable outlook to the city's long-term ratings is based on recent actions to rebuild the city's financial position. Like many Ohio cities, Toledo is dependent on economically sensitive income taxes for its operating and capital needs. As such, the maintenance of adequate reserves to offset economic declines is critical to the stabilization of financial operations. Modest improvement in the city's employment base should help stabilize the income tax revenues from the downward trajectory experienced in 2008 and 2009. The city remains confident that income tax collections will reach the $138 million target for the year; however, negative budget variances in FY2010 current fiscal year could pose further challenges that will continue into FY2011, the budget gap for which has yet to be addressed. We believe that continued efforts to restore structural balance and rebuild liquidity in line with the city's long-term goal to establish a Budget Stabilization Fund equivalent to 5% to 8% of annual expenditures will be critical to maintaining a financial profile consistent with the current rating.

What would change the rating UP (or revise the outlook to positive)-

-Improved performance of key revenue streams that will allow the city to record an operating surplus exceeding current budget expectations.

-Demonstrated ability to continue making long-term budgetary changes to mitigate expenditure pressures.

-Continued enhancement of revenue streams within the city's control to provide adequate resources for the level of services currently being maintained.

-Increased liquidity to provide adequate cushion to offset unforeseen negative budget variances.

-Evidence of improved economic conditions as reflected by reduced unemployment levels and increased tax base valuation growth.

- Successful diversification of top employers to mitigate concentration in any one employer or industry.

What would change the rating DOWN (or revise the outlook to negative)-

-Negative budget variances leading to further decline in the General Fund deficit position.

-Inability to sustain long-term budgetary adjustments sufficient to improve overall financial position and the ability to absorb future budgetary challenges.

-Further stagnation of local economic trends with limited growth or continued decline in income tax collections.

-Indications that economic health is further declining, as demonstrated by continued population loss, higher unemployment rates, and residential housing losses.

KEY STATISTICS

2000 Population: 313,619 (5.8% decline from 1990)

2008 Population (census estimate): 293,201 (6.5% decline from 2000)

2010 Full Valuation: $10.7 billion

Estimated Full Value per Capita: $36,461

2000 Per capita income: $17,388 (82.8% of State, 80.5% of US)

2000 Median family income: $41,175 (82.3% of State and US)

August 2010 Unemployment rate: 11.9% (9.5% State, 9.7% US)

Debt Burden: 4.4% (Direct: 2.2%)

FY2009 General Fund balance: -$9.1million (-4.1% of General Fund revenues)

GOLT debt outstanding: $160.8 million

The principal methodology used in rating the City of Toledo (OH) was Bond Anticipation Notes and Other Short-Term Capital Financings, rating methodology published in May 2007. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit 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

Henrietta Chang
Analyst
Public Finance Group
Moody's Investors Service

Edward Damutz
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
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USA

MOODY'S ASSIGNS MIG 1 RATING TO CITY OF TOLEDO'S (OH) $14.15 MILLION CAPITAL IMPROVEMENT NOTES, SERIES 2010-2
No Related Data.
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