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MOODY'S ASSIGNS MIG 1 RATING TO THE CITY OF WARRENSVILLE HEIGHTS' (OH) $8.9 MILLION VARIOUS PURPOSE IMPROVEMENT BOND ANTICIPATION NOTES, SERIES 2011-1

19 Jan 2011

A1 RATING AFFECTS $1.1 MILLION OF OUTSTANDING RATED GOLT DEBT

Municipality
OH

Moody's Rating

ISSUE

RATING

Various Purpose Improvement Bond Anticipation Notes (GOLT), Series 2011-1

MIG 1

  Sale Amount

$8,935,060

  Expected Sale Date

01/20/11

  Rating Description

Bond Anticipation Notes

 

Opinion

NEW YORK, Jan 19, 2011 -- Moody's Investors Service has assigned a MIG 1 rating to the City of Warrensville Heights' $8.9 million Various Purpose Improvement Bond Anticipation Notes (General Obligation Limited Tax), Series 2011-1. Concurrently, Moody's has affirmed the A1 rating on the city's outstanding general obligation limited tax debt, affecting $1.1 million.

SUMMARY RATINGS RATIONALE

Secured by the city's general obligation limited tax pledge, the current offering will retire notes maturing on February 3, 2011, while paying down approximately $200,000 of the balance of the maturing notes. Proceeds from the original note issuances were used to finance various street and property improvements throughout the city. 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 notes and bonds, and the credit quality reflected in the A1 underlying rating. Affirmation of the A1 long-term rating reflects the city's improving financial position supported by narrow reserves; modestly-sized tax base; and manageable debt burden with rapid amortization.

STRENGTHS

-Improving General Fund financial operations following income tax rate increase

-Rapid repayment of debt principal

CHALLENGES

-Above average debt burden primarily comprised of short-term notes

-Modestly-sized tax base with little new development

DETAILED CREDIT DISCUSSION

EXPECTED MARKET ACCESS FOR REFINANCING OF THE CURRENT ISSUE

The city's demonstrated ability to access the market includes annual note sales over the last five years through negotiated sales. The current notes are refinancing notes that mature on February 3, 2011, with an expected sale date of January 20, 2011, well in advance of the maturity date. Many Ohio (Aa1/negative outlook) cities keep a portion of their debt in notes in order to access more favorable short-term rates and to allow for flexibility in paying 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 the take out debt well in advance of final maturity, and considering alternate back up plans if necessary. Should the city experience problems with remarketing the notes due to market disruption, as a back-up option, the city would seek a bank loan to repay the notes. The city does not currently have adequate cash on hand to retire the outstanding notes.

MODESTLY-SIZED INNER RING CLEVELAND SUBURB

The city of Warrensville Heights is an inner ring suburb located 8 miles outside Cleveland (GO rated A1/stable). The city is a relatively mature community with a substantial commercial presence. Commercial and industrial property comprised approximately 55.6% of the city's tax base in 2010. We expect limited tax base growth going forward as the city is nearly built-out and residential and commercial development have been fairly stagnant in recent years. The city is home to South Pointe Hospital, an affiliate of Cleveland Clinic, which is the city's largest employer at 1,523 employees. In addition, two of the city's larger employers, Heinen's Incorporated retail food chain and Sherwin-Williams Automotive Finishes, have their headquarters in the city. In 2010, the city's modestly-sized tax base was valued at $769 million and remains somewhat concentrated as the top ten taxpayers represent 21.4% of assessed valuation. Despite this moderate concentration, property taxes comprise a small percentage of the city's revenues, mitigating the impact that loss of a property taxpayer could have on the city's financial operations. Income tax collections are slightly more diversified as there is only one payer with a greater than 5% share of total income tax revenues. Full value per capita is below the state average at $56,463, while median family and per capita incomes are below state averages at 83.9% and 88.6% respectively. Cuyahoga County's unemployment rate (9.0% in October 2010) is below that of the state (9.5%), and equal to the nation's rate for the same period.

IMPROVED FINANCIAL OPERATIONS ALTHOUGH POSITION REMAINS NARROW

We expect the city's financial performance to remain narrow though improve from recent levels due to the passage of an income tax rate increase in 2009. From fiscal 2007 through 2009, the city consistently drew upon its reserves, with General Fund reserves narrowing from $1.3 million, or 9.1% of revenues in fiscal 2006, to $270,000, or a very limited 1.9% of General Fund revenues in fiscal 2009. Management attributed the decline in reserves to rising personnel costs and large settlements with bargaining units. On a cash basis, the General Fund reached a deficit position of -$634,323 at the end of fiscal 2009, though the General Fund borrowed from the Bond Retirement Fund and Nonmajor Capital Projects Fund to eliminate the negative cash balance at year-end. Positively, due primarily to an increase in the income tax rate effective July 2009, city officials report that the city ended 2010 with an estimated cash basis operating surplus of $1.8 million in the General Fund. In 2009, residents voted to increase the income tax rate to 2.6% from 2.0% and this increase resulted in income tax receipts higher than budgeted in fiscal 2010, driving the operating surplus. Due to the surplus operations, the General Fund was able to repay the Bond Retirement Fund and Nonmajor Capital Projects fund, and officials report that the estimated General Fund cash balance at fiscal 2010 year end was about $1.0 million, or a still narrow 6% of General Fund receipts.

Looking ahead, despite the income tax rate increase, the city's fiscal 2011 budget assumes a slight drawdown of General Fund reserves and the city is budgeting for a year-end cash balance of about $750,000, or a limited 5.3% of 2009 General Fund receipts. The decline in reserves is due in part to the set aside of $1 million per year for future debt service on short-term notes that the city expects to issue in 2011. As part of the income tax rate increase, the city stated that a portion of the increased funds would be used for redevelopment of the city's Town Center, and the city will begin setting aside these funds in 2011. The city expects to receive a modest amount of additional revenue beginning in 2011 as member of a Joint Economic Development District (JEDD) with Cleveland and the surrounding area. The city is expected to benefit from income tax revenue growth due to the construction of a new university hospital in nearby Beachwood (rated Aaa) within the JEDD, with a payment of $250,000 expected for 2011. While the city was able to modestly improve its financial position in 2010, overall financial operations are expected to continue to be pressured due to currently narrow reserves which provide minimal cushion given reliance on economically sensitive income taxes. Income tax revenues account for the city's largest revenue source and made up 78.2% of General Fund revenues in fiscal 2009. Any pressures on this revenue source or other key revenue or expenditure items that result in an inability to maintain adequate reserves could affect overall credit quality. Future credit reviews will continue to focus on management's ability to retain and build current reserves to adequate levels.

ABOVE AVERAGE DEBT POSITION; RAPID PAYOUT; FUTURE BORROWING PLANS

We believe the city's above average debt burden of 5.1% of full value (2.5% direct) is manageable and the city benefits from its rapid amortization of direct obligations. Principal amortization of direct debt is above average with 100% of principal paid out in ten years. The city has about 94% of its direct debt in short-term notes, which is well above average for Ohio cities, resulting in significant exposure to market access risks. We expect the city to continue to manage its market access needs as it has historically. The city intends to issue an additional $11.2 million in short-term notes this year for redevelopment of its Town Center. Development includes construction of a new recreation center that will be operated by the YMCA of Greater Cleveland. This debt issuance is expected to increase the city's debt burden to 6.6% of full value (4.0% direct), which is well above average for Ohio cities. However, we note that beginning in fiscal 2011, the city intends to set aside $1.0 million of income tax collections per year to support debt service on the upcoming issuance. All of the city's outstanding debt is fixed rate, and the city is not a party to any interest rate swap agreements.

WHAT COULD CHANGE THE RATING - UP

-Substantial expansion of the city's tax base

-Significant increase in General Fund reserves to levels sufficient to offset the city's reliance on economically sensitive income taxes

WHAT COULD CHANGE THE RATING - DOWN

-Deterioration of the city's existing General Fund financial reserves

-Significant declines in economically sensitive income tax revenues without offsetting budgetary adjustments

KEY STATISTICS

2000 Census population: 15,109 (4% decline since 1990)

2009 Estimated population: 13,520 (10.5% decline since 2000)

2010 Full value: $769 million (0.3% average annual increase from 2005)

2010 Full value per capita: $56,463

2000 Per capita income: $18,611 (88.6% of state; 86.2% of U.S.)

2000 Median family income: $41,962 (83.9% of state; 83.8% of U.S.)

Cuyahoga County unemployment rate (October 2010): 9.0%

Fiscal 2009 General Fund balance: $270,000 (1.9% of General Fund revenues)

Overall debt burden: 5.1% (2.5% direct)

Principal amortization: 100%

Post-sale general obligation long-term debt outstanding: $1.1 million

Post-sale general obligation short-term debt outstanding: $18 million

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Bond Anticipation Notes and Other Short-Term Capital Financings published May 2007.

REGULATORY DISCLOSURES

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

Matthew Butler
Analyst
Public Finance Group
Moody's Investors Service

Emily Robare
Backup Analyst
Public Finance Group
Moody's Investors Service

Henrietta Chang
Senior Credit Officer
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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New York, NY 10007
USA

MOODY'S ASSIGNS MIG 1 RATING TO THE CITY OF WARRENSVILLE HEIGHTS' (OH) $8.9 MILLION VARIOUS PURPOSE IMPROVEMENT BOND ANTICIPATION NOTES, SERIES 2011-1
No Related Data.
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