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Rating Action:

Moody's downgrades Cincinnati's (OH) GO to Aa2 from Aa1; downgrades economic development, non-tax revenue and Convention Facilities Second Lien Revenue, Series 2004 debt to Aa3 from Aa2; Outlook revised to negative

Global Credit Research - 15 Jul 2013

Aa2 rating applies to $520.4 million of post-sale general obligation unlimited tax debt

New York, July 15, 2013 -- Moody's Investors Service has downgraded to Aa2 from Aa1 the rating on the City of Cincinnati's (OH) general obligation unlimited tax debt. Concurrently, Moody's has downgraded to Aa3 from Aa2 the rating on the city's outstanding economic development and non-tax revenue debt and the Convention Facilities Authority of Hamilton County's Second Lien Revenue Bonds, Series 2004. The outlook has also been revised to negative. The Aa2 rating applies to $520.4 million of outstanding general obligation unlimited tax debt. The Aa3 rating applies to $101.4 million of economic development and non-tax revenue debt and $18.1 million of the Convention Facilities Authority of Hamilton County's Second Lien Revenue Bonds, Series 2004 (an additional $11.9 million has been legally defeased).

SUMMARY RATING RATIONALE

The city's general obligation debt is secured by the city's general obligation unlimited tax pledge. The downgrade to Aa2 reflects the city's exposure to two statewide multi-employer cost-sharing pension plans as well as the city's single-employer plan; the city's pressured but still satisfactory financial position, including the recent stabilization of income tax revenues; moderate financial flexibility provided by available but unused levy authority; the city's economically diverse economic base; relatively weak socio-economic indices; above average debt position with significant sources of non-levy support; and the relatively strong funded position of the city's single-employer plan OPEB liabilities.

The Aa3 rating on the economic development non-tax revenue debt is based on the credit characteristics inherent in the Aa2 general obligation rating; the legal provisions of the master and supplemental trust indentures that govern the city's economic development non-tax revenue debt; and the satisfactory debt service coverage provided by specific non-tax General Fund revenues.

The Aa3 rating on the Convention Facilities Authority of Hamilton County's Second Lien Revenue Bonds, Series 2004 is based on the legal structure, in particular the city's pledge to replenish the Contingent City Rent Fund and Revenue Stabilization Fund, if primary pledged city and county hotel tax revenues are insufficient to pay debt service.

The negative outlook reflects the expectation that the city will continue to face challenges in attaining structurally balanced operations, stemming from its unfunded pension liabilities and reliance on a number of one-time budgetary solutions in recent years.

The city's rating was placed on review for downgrade due to its large adjusted net pension liability relative to its rating category as part of our new approach to analyzing state and local government pension liabilities. For further details please see the April 17, 2013 release of "Moody's announces new approach to analyzing state, local, government pensions; 29 local governments placed under review." The review has been completed with the downgrade of the city's general obligation rating to Aa2, the downgrade of the city's economic development and non-tax revenue debt to Aa3, and the downgrade of the Convention Facilities Authority Second Lien Revenue Bonds, Series 2004 to Aa3. We believe the Aa2 GO rating incorporates the city's sizeable adjusted net pension liability as well as the city's other long-term credit fundamentals.

STRENGTHS

-Resumed growth of income tax revenues trends following declines in recent years

-Retained financial flexibility afforded by available but unused levy authority

-Diverse regional economy anchored by numerous corporate headquarters, health care organizations, and higher education institutions

-Healthy GAAP-basis General Fund reserves

CHALLENGES

-Reliance on economically sensitive income tax revenues for the majority (67%) of General Fund revenues; income tax collections declined considerably during the economic downturn

-Substantial budget gaps during recent fiscal years required significant expenditure reductions and one-time budgetary solutions, which may limit cost cutting options to address future pressures

-High pension burden associated with the city's exposure to two statewide multi-employer cost-sharing plans, as well as the city's single employer plan for which annual contributions are well below actuarial requirements

-Resident per capita and median family income levels lag those of similarly rated credits

Outlook

The outlook on the City of Cincinnati is negative, reflecting our expectation that the city will continue to face budgetary pressure stemming from required pension contributions to the City Retirement System and potential long-term pressure from its exposure to statewide multi-employer cost-sharing pension plans. Further, the city has a budget with General Fund expenses exceeding revenues for the current fiscal year 2014. While the city has a track record of achieving better operating results than its initial budgets and forecasts, it has also maintained its financial position in recent years in part by relying on one-time budgetary solutions and not contributing the full actuarially required contribution to its single-employer pension plan, which indicates a current lack of structural balance. A failure to regain structural balance could result in further deterioration in the city's credit rating.

WHAT COULD CHANGE THE RATING UP (or revise the outlook to stable)

-Expenditure reductions and/or implementation of revenue enhancements that move the city towards structurally balanced operations

-Economic expansion that leads to resumed valuation growth

-Significant improvement of resident income levels, unemployment rates, and other socioeconomic indicators that have historically lagged those of similarly rated credits

-Substantial reduction of unfunded pension liabilities and annual funding of actuarially required contributions

WHAT COULD CHANGE THE RATING DOWN

-Negative budget variances coupled with an inability or unwillingness to implement corresponding expenditure reductions or alternate revenue generators

-Further declines in liquidity and/or fund balances to levels materially below fiscal 2012 reserves

-Inability to enact long-term pension contribution strategy to improve funded status of CRS

-Increased exposure to unfunded pension liabilities

-Economic stagnation that impedes tax base growth and detracts from the success of economic revitalization efforts

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by US Local Governments published in April 2013. 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 certain 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 certain 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 certain 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Thomas Aaron
Analyst
Public Finance Group
Moody's Investors Service, Inc.
100 N Riverside Plaza
Suite 2220
Chicago, IL 60606
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Jeffery Yorg
Asst Vice President - Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Cincinnati's (OH) GO to Aa2 from Aa1; downgrades economic development, non-tax revenue and Convention Facilities Second Lien Revenue, Series 2004 debt to Aa3 from Aa2; Outlook revised to negative
No Related Data.

 

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