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MOODY'S DOWNGRADES CITY OF SHEFFIELD LAKE'S (OH) GOLT RATING TO A2 FROM A1 IN CONJUNCTION WITH SALE OF $1.6 MILLION STORM WATER UTILITY GOLT REFUNDING BONDS, SERIES 2010; ASSIGNS MIG 1 TO $3.3 MILLION LAND ACQUISITION BOND ANTICIPATION NOTES, SERIES 2010

15 Nov 2010

A2 RATING APPLIES TO $2.9 MILLION OF OUTSTANDING GOLT DEBT

Municipality
OH

Moody's Rating

ISSUE

RATING

Storm Water Utility Improvement (General Limited Tax) Refunding Bonds, Series 2010

A2

  Sale Amount

$1,560,000

  Expected Sale Date

11/16/10

  Rating Description

General Obligation Limited Tax

 

Land Acquisition (General Limited Tax) Bond Anticipation Notes, Series 2010 (Taxable)

MIG 1

  Sale Amount

$3,250,000

  Expected Sale Date

11/16/10

  Rating Description

Bond Anticipation Notes

 

Opinion

NEW YORK, Nov 15, 2010 -- Moody's Investors Service has downgraded the City of Sheffield Lake's (OH) general obligation limited tax rating to A2 from A1, affecting $2.9 million of rated debt outstanding. Concurrently, Moody's has assigned a MIG 1 rating to the city's $3.3 million Land Acquisition (General Limited Tax) Bond Anticipation Notes, Series 2010 (Taxable) and an A2 rating to the city's $1.6 million Storm Water Utility Improvement (General Limited Tax) Refunding Bonds, Series 2010.

RATINGS RATIONALE

Both the bonds and notes are secured by the city's general obligation limited tax pledge, subject to the ten mill limitation. Proceeds of the Series 2010 notes will be used to partially retire the city's Series 2009 Bond Anticipation Notes, which mature on November 30, 2010. Approximately $250,000 of cash on hand will also be used to retire the notes. Proceeds of the Series 2010 bonds will be used to currently refund the city's Series 2000 bonds for an estimated net present value savings of $169,000, or 11.6% of refunded par. The downgrade to the A2 rating reflects the city's weakened financial operations with limited cash reserve levels and the expectation that the city's financial position will not materially improve over the medium-term; small tax base located near the City of Cleveland (GOLT A2/stable outlook); and average debt burden with no additional borrowing plans.

The Series 2010 notes (dated November 23, 2010) mature November 22, 2011 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 A2 GOLT rating.

EXPECTED MARKET ACCESS FOR REFINANCING

The city's demonstrated ability to access the market includes annual note borrowing since 2008. The city expects to roll the Series 2010 notes into an additional series of notes prior to maturity on November 22, 2011. The notes were originally issued in November 2008 to fund the city's acquisition of the Shoreway Shopping Center to support local redevelopment efforts. The city expects to continue to roll the notes for the several years and ultimately plans to repay the notes with revenues generated from the sale of the property. Many Ohio (G.O. Aa1/negative outlook) issuers 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 prior to converting the bonds into long term debt. 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. The notes will be sold on a negotiated basis with representatives from Ross, Sinclaire & Associates, the underwriter on the note sale, anticipating favorable market access given the underlying credit quality of the city.

WEAKENED FINANCIAL OPERATIONS WITH LIMITED OPERATING RESERVES

The city's financial operations have historically been narrow, with a voter-authorized 0.25% income tax rate increase in 2007 yielding only modest operating surpluses, bringing General Fund reserves at the end of fiscal 2008 to $314,000, an adequate 10% of General Fund reserves on a percentage basis, though narrow on a nominal basis. Going into fiscal 2009, the city implemented a hiring freeze and eliminated four positions through attrition. Despite these reductions, the city ended fiscal 2009 with a $91,000 operating deficit due to declines in major revenue streams, including income tax receipts, and yielded an ending General Fund balance of $223,000, or a limited 6.7% of receipts. We note that at our last credit review in October 2009, the city had projected a slight surplus for fiscal 2009, and management attributes the discrepancy to an estate tax settlement that was received in fiscal 2010 instead of fiscal 2009. Due primarily to estate taxes exceeding budget by approximately $250,000, the city is currently expecting a $100,000 cash basis operating surplus for fiscal 2010 (ending December 31), which would yield a cash carryover balance of $225,000, or a still narrow 6.7% of receipts. For fiscal 2011, management plans to have a balanced budget and does not expect to either spend reserves or substantively add to reserves. While it is positive to see that the city is projecting an operating surplus for fiscal 2010 and balanced budget for fiscal 2011, cash reserves are expected to continue to remain narrow, giving the city limited financial cushion in the case of unexpected budgetary variances.

The city derives nearly half of its operating revenues from its 1.5% municipal income tax (45.9% of 2009 operating revenues). The balance of core revenues is comprised of intergovernmental support at 13.8% and property taxes at 11.1%. Twenty percent of income tax receipts are dedicated to road improvements, an allocation that can only be modified by voter approval. Income tax receipts increased 1.5% in 2008, declined 4.9% in fiscal 2009, and are estimated to decline by approximately 2.5% in fiscal 2010 (compared to a budgeted 4% decline). The city has projected flat income tax receipts for fiscal 2011. Representing some uncertainty for the fiscal 2011 budget is the city's union contracts, which all expire at the end of fiscal 2010. Additionally, the city purchased Shoreway Shopping Center in 2008 and is now the landlord of the center, which presents some risk should tenants leave the center or if unexpected repairs are needed. Given the continuation of challenging economic and fiscal climates, the city's reliance on economically-sensitive income taxes, and the lack of an immediate plan to build reserves to satisfactory levels, we expect the city's financial operations will remain weakened in the near to medium term.

SMALL RESIDENTIAL TAX BASE LOCATED ON LAKE ERIE NEAR CLEVELAND

Located 25 miles west of the City of Cleveland in Lorain County (GOLT Aa2), Sheffield Lake is a mature city on Lake Erie with a primarily residential tax base. The city's small $458 million tax base has experienced modest valuation declines in recent years due to the State of Ohio's phase out of its tangible personal property tax from 2006 to 2009. Additionally, a 6.4% decline in valuation in 2010 was primarily attributed to softening real estate values following the city's triennial update. Development is largely residential, reflecting the city's location that is within commuting distance to Cleveland. Commercial development is primarily retail -focused, including the Shoreway Shopping Center, which provides neighborhood retail services, including a grocery store, bank, and drugstore. The city has redeveloped portions of the center since acquiring it in 2008, including installation of a wind turbine by NextGen Energy and building a free boat launch across the street from the center. While residents benefit from employment opportunities throughout the Cleveland metropolitan area, Ford Motor Company (corporate family rating Ba2/stable outlook) in adjacent Avon Lake (GOLT Aa2) accounts for an estimated 5% of local income tax receipts. The closure of the Ford plant in nearby Lorain (GOLT A3) in December 2005 led to stabilization at the Avon Lake facility as Econoline van production was consolidated there, though the facility did experience some lay-offs in 2009. Despite significant challenges within the domestic automotive sector, operations are the Avon Lake facility are reportedly stable, and Ford recently announced its plans to increase operations at the facility starting in January 2011. Income indices approximate state and national medians with per capita and median family income at 93.7% and 110.1% of national figures, respectively, in the 2000 census. Lorain County's unemployment rate (9.9% in August 2010) remains elevated, and slightly exceeds the state (9.7%) and national (9.5%) rates for the same time period.

AVERAGE DEBT POSITION WITH NO ADDITIONAL BORROWING PLANS

The city's debt position is average with overall debt at 1.7% of full value and direct debt at 1.6%. We expect the city's debt profile to remain affordable as the city has no additional borrowing plans in the near term. Approximately 20% of the city's debt is repaid with storm water revenues (including the current long-term issuance), though the storm water system had 0.88 times debt service coverage on its outstanding general obligation debt in fiscal 2009, and the city does not currently have any fee increases planned. Principal amortization is above average, with 87% of principal expected to be repaid within ten years, which does not include amortization on the city's outstanding bond anticipation notes. Short term notes make up 54% of the city's outstanding debt, representing moderate market access risk. 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 the change the long-term rating - UP

- Significant strengthening of fund balances and liquidity

- Strengthening of tax base and demographic profile

What could the change the long-term rating - DOWN

- Return to structural imbalance in the General Fund and material declines in fund balances and liquidity

- Deterioration of the city's tax base and demographic profile

KEY STATISTICS:

2000 Population: 9,371 (4.6% decline since 1990)

2009 Estimated population: 8,912 (4.9% decline since 2000)

Estimated full value per capita: $51,405

1999 Per capita income (as % of state and U.S.): $20,219 (96.3% and 93.7%)

1999 Median family income (as % of state and U.S.) : $55,078 (110.1% and 110.1%)

Lorain County unemployment rate (August 2010): 9.9%

FY2009 General Fund balance: $223,000 (6.7% of General Fund revenues)

Debt burden: 1.7% (1.6% direct)

Principal amortization (10 years): 87.0%

Post-sale long-term general obligation limited tax debt outstanding: $2.9 million

Post-sale short-term general obligation limited tax debt outstanding: $4.0 million

PRINCIPAL METHODOLOGY

The principal methodologies used in this rating were General Obligation Bonds Issued by U.S. Local Governments published in October 2009 and Bond Anticipation Notes and Other Short-Term Capital Financings published in 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

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
250 Greenwich Street
New York, NY 10007
USA

MOODY'S DOWNGRADES CITY OF SHEFFIELD LAKE'S (OH) GOLT RATING TO A2 FROM A1 IN CONJUNCTION WITH SALE OF $1.6 MILLION STORM WATER UTILITY GOLT REFUNDING BONDS, SERIES 2010; ASSIGNS MIG 1 TO $3.3 MILLION LAND ACQUISITION BOND ANTICIPATION NOTES, SERIES 2010
No Related Data.
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