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Rating Update:

MOODY'S DOWNGRADES TO Baa1 FROM A3 THE RATING ON THE CITY OF MANSFIELD'S (OH) $12.7 MILLION OF OUTSTANDING DEBT; RATING REVISED TO NEGATIVE OUTLOOK

25 Aug 2011

Municipality
OH

Opinion

NEW YORK, Aug 25, 2011 -- Moody's Investors Service has downgraded to Baa1 from A3 the rating on the city of Mansfield's (OH) $12.7 million of outstanding rated general obligation limited tax bonds. Concurrently, the outlook has been revised to negative.

SUMMARY RATINGS RATIONALE

The city's general obligation limited tax pledge is supported by its general taxing authority, subject to a statutory ten mill limitation. The downgrade to the Baa1 rating reflects the city's ongoing efforts to implement its adopted recovery plan after being placed in fiscal emergency by the state of Ohio; challenging broader economy as the moderately-sized and mature tax base continues to recover from the economic downturn; and manageable debt profile. The negative outlook reflects our expectation that implementation of the recovery plan may be impeded by practical barriers to implement expenditure reductions necessary to return to balanced operations, lack of voter approval for additional revenue streams that will be sufficient to fund city operations, or economic deterioration that could offset any budgetary adjustments made by management. Further, any changes to upper-level management positions, which may occur this fall, may impact the recovery which could diminish overall credit quality of the city over the near to medium term.

STRENGTHS

- Under fiscal emergency with recovery plan adopted

- General Fund posted an operating surplus in fiscal 2010

- Increase in income tax revenues in fiscal 2010, projected increase in receipts for fiscal 2011

CHALLENGES

- Ongoing fund deficit in Safety Services Fund that is projected to remain over the near to medium term

- Lack of consensus amongst management regarding implementation of key aspects of the recovery plan

- Challenging broader economy across the city as it recovers from economic downturn

DETAILED CREDIT DISCUSSION

CITY PLACED UNDER FISCAL EMERGENCY IN 2010; RECOVERY PLAN ADOPTED BY CITY

On August 19th, 2010, the state of Ohio (Aa1/negative outlook) placed the City of Mansfield in fiscal emergency status under the Ohio Revised Code. There are six conditions that may qualify a municipality for fiscal emergency. One of those conditions is when the aggregate of deficit amounts of all funds exceeds one-sixth of the total of the general fund budget for that year and the receipts available to those deficit funds during that year, which was found to exist in Mansfield as of December 31, 2009.

As part of the fiscal emergency status, Mansfield is required to work with the Fiscal Emergency Supervision Commission to put together a comprehensive recovery plan to bring the aggregate fund balances up to code. The recovery plan was initially adopted in February 2011 and updated in April 2011. Management reports that certain aspects of the plan have already been adopted, including staffing reductions, fire fighter collective bargaining concessions, reduction of street lighting usage and the implementation of a license plate fee. The city is also considering additional revenue enhancements, including a storm water runoff fee and a quarter percentage point increase to the city's existing 1.75% income tax rate. Voter approval is required to increase the income tax rate and the city has not committed to pursuing this option by bringing the issue to voters.

PRESSURED FINANCIAL POSITION CONTINUES; BALANCED OPERATIONS PROJECTED FOR FISCAL 2012

The city's financial operations are expected to remain pressured for the near to medium term given the ongoing deficit balance in city's Safety Services Fund and dependence on significant expenditure reductions and/or revenue enhancements for balanced operations going forward. The city accounts for the majority of its public safety expenditures, which make up 76.5% of total fiscal 2010 operating expenditures, in its Safety Services Fund. The Safety Services Fund is maintained outside the General Fund with a budget over twice as large as the General Fund and is primarily funded by income taxes, which comprised 89.5% of revenues for the Safety Services Fund and 61.6% of total operating revenues for the combined General and Safety Services Fund in 2010. The city has been experiencing operating shortfalls in its General Fund between fiscal 2007 and fiscal 2009, with the Safety Services Fund posting operating shortfalls since fiscal 2008. Income tax receipts declined 3.3% in fiscal 2008, followed by an 8.5% decline in fiscal 2009. The city also experienced declines in the General Fund's largest revenue stream, intergovernmental sources, which account for 45% of General Fund revenues and 14% of total combined General and Safety Services Fund revenues and saw an even steeper decline of 22.9% in 2009, though we note this calculation is somewhat skewed as the city received a large estate tax settlement in fiscal 2008, which artificially inflated 2008 receipts.

In reaction to the revenue shortfalls, the city implemented a series of substantial expenditure reductions in 2009 including the elimination of 55 general staff positions, as well as nearly 40 police and fire positions. Despite these adjustments, the city ended fiscal 2009 with a combined $2.5 million accrual basis operating shortfall in the General Fund and Safety Services Fund, which led the Safety Services Fund to have a deficit fund position on both a cash and accrual basis. The General Fund extended a $1.8 million interfund loan to the Safety Services Fund to eliminate its cash basis deficit position, though the fund maintained a -$1 million deficit on an accrual basis. Collectively, the General Fund and Safety Services Fund ended fiscal 2009 with a -$1 million GAAP basis deficit fund balance, or -3.7% of revenues, and an unreserved balance of -$3.4 million, or -12% of revenues. The larger unreserved balance accounts for the interfund loans made by the General Fund.

For fiscal 2010, the General Fund posted an operating surplus of approximately $848,000, while the Safety Services Fund posted another operating deficit of approximately $456,000. The deficit balance of the Safety Services Fund rose to $1.5 million; the two funds combined ended fiscal 2010 with a nearly -$671,000 GAAP basis deficit fund balance, or -3.1% of revenues. Income tax revenues demonstrated a measure of stabilization by increasing $172,000 or 0.7% over fiscal 2009 collections, with management projecting continued gains in fiscal 2011 due to an increase in net profits for local businesses. Fiscal 2011 is expected to end with a $1.9 million cash-basis fund deficit in the Safety Services Fund, which management notes will likely be carried over into outlying years. The city is working on its fiscal 2012 budget and implementation of the recovery plan, noting that it will produce a plan that allows for balanced operations in both the General Fund and the Safety Service Funds. Management stated, however, that it is not expecting to eliminate the deficit fund balance in the Safety Service Fund in fiscal 2012 and the elimination of the deficit may take up to five years.

In November 2011 many upper level management positions, including the mayor, city council president and finance director, will be up for re-election. Given the high level of involvement of these three positions in the recovery plan and budgeting process for fiscal 2012 (both the mayor and the city council president serve on the financial planning and supervision commission), changes at this level may impact the overall successful implementation of the recovery plan. Going forward, and even with a successful implementation of the city's recovery plan, it is expected that eliminating the deficit position in the Safety Services Fund and rebuilding reserves will take considerable time to given the significant expenditure reductions that must take place and the tenuous nature of future revenue enhancements.

AVERAGE TAX BASE HAS LIMITED GROWTH PROSPECTS

Located in Richland County (A1/negative outlook), Mansfield is the county seat with a relatively challenged employment base. The city's moderately-sized $1.8 billion tax base has seen assessed value declines for five consecutive years, with an average annual decline of -4.7% over the last five years. Most of the decline can be attributed to the state of Ohio's phasing out of tangible personal property tax, which was completely phased out as of 2009, as well as limited new construction. In 2006, tangible personal property had an assessed value of $110.4 million, which equaled a substantial 14.9% of the city's assessed value. Assessment of that property has now been fully phased out and while the state's distribution of a commercial activity tax replaced the city's lost revenues, holding it harmless, that transfer will begin to be phased out by the state during its 2012 fiscal year. Over the same time period, real property has declined, falling from a 2006 assessed valuation of $612.4 million to a 2010 assessed valuation of $601.6 million.

Management reports operations at the city's largest employers, including Med-Central Hospital (2,500 employees; 4.7% of total city employment) and Richland County (938 employees; 1.8% of total city employment), have decline somewhat from previous years' levels. Additionally, a General Motors (corporate family rating Ba2/stable outlook) stamping plant in nearby Ontario (A1) closed in early 2010. The plant had employed 2,800 people in 2008. Unemployment numbers for the city have historically been higher than state and national medians. This trend continued through May 2011 when the city had an unemployment rate of 11.0%, compared to the state (8.5%) and national (8.7%) rates for the same time period. The city's unemployment rate has fallen from its peak of 12.4% in 2009, due in part to AK Steel reopening its plant following a 2009 shutdown, which resulted in 261 employees returning to work. Despite this recent recovery, we expect the city's local economy will continue to be challenged over the near term due to the ongoing struggles facing the large manufacturing sector in the region.

MANAGEABLE DEBT PROFILE WITH NO ADDITIONAL BORROWING PLANS

The city's debt profile is expected to remain manageable over the near to medium term given its modest direct obligations, aggressive amortization of principal payments and limited borrowing plans. The city's overall debt burden is manageable at 1.5%, with direct obligations at a more modest at 0.5%. The city has no additional borrowing plans and principal amortization is rapid, with 92.7% repaid in ten years. All of the city's debt is fixed rate and officials have no plans to issue additional debt over the near term.

Outlook

The negative outlook reflects our expectation that implementation of the recovery plan may be impeded by practical barriers to implement expenditure reductions necessary to return to balanced operations, lack of voter approval for additional revenue streams that will be sufficient to fund city operations, or economic deterioration that could offset any budgetary adjustments made by management. Further, any changes to upper-level management positions, which may occur this fall, may impact the recovery which could diminish overall credit quality of the city over the near to medium term.

What could change the rating - UP (or change the outlook to stable):

- Successful economic development efforts resulting in stabilization of employment base and improvement of other economic indicators

- Successful implementation of a feasible recovery plan

- Improved financial operations leading to satisfactory liquidity levels and operating fund balances across all funds

What could change the rating - DOWN:

- Declining overall liquidity resulting in an inability to meet cash flow needs

- Material declines in operating fund balances resulting in continued deficit fund positions

- Unrealistic plan put in place to reverse deficit fund balance

KEY STATISTICS

2000 Population: 49,346 (2.5% decline since 1990)

Estimated 2010 Population: 47,821 (3.0% decline since 2000)

2010 full valuation: $1.8 billion (4.7% average annual decline since 2005)

2010 full value per capita: $36,851

Median Family Income: $37,541 (75.0% of state and U.S.)

Per Capita Income: $17,726 (84.4% of state and 82.1% of US)

Unemployment: 11.0% (May 2011)

Fiscal 2010 General Fund balance: $839,000 (8.7% of revenues)

Fiscal 2010 Unreserved General Fund balance: -$1.3million ( -13.2% of revenues)

Direct debt burden: 0.5%

Overall debt burden: 1.5%

General Obligation Limited Tax Debt outstanding: $7.5 million

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. 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, 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 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Genevieve Nolan
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 DOWNGRADES TO Baa1 FROM A3 THE RATING ON THE CITY OF MANSFIELD'S (OH) $12.7 MILLION OF OUTSTANDING DEBT; RATING REVISED TO NEGATIVE OUTLOOK
No Related Data.
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