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The original item was published from 4/13/2017 9:44:31 AM to 1/2/2018 12:00:06 AM.

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Finance Department News

Posted on: April 13, 2017

[ARCHIVED] Fitch Affirms Beachwood

Fitch Ratings-New York-13 March 2017: Fitch Ratings has affirmed the following City of Beachwood, OH ratings at 'AAA':


--Approximately $5 million limited tax general obligation (LTGO) bonds, series 2015;

--$170,000 LTGO bonds series 2000;

--Issuer Default Rating (IDR).


The Rating Outlook is Stable.

SECURITY

The bonds are payable from the city's full faith and credit and ad valorem tax subject to the 9.2-mill city charter limitation.

KEY RATING DRIVERS

The 'AAA' rating reflects the city's exceptionally strong gap-closing capacity, excellent institutionalized financial management practices, moderate long-term liability burden, and stable economic underpinnings.

Economic Resource Base

The city is located approximately 13 miles from downtown Cleveland in Cuyahoga County and serves as a regional retail and office center for the eastern Cleveland suburbs. Population has declined approximately 3% between 2000 and 2015, to 11,762.

Revenue Framework: 'aaa' factor assessment

Fitch expects revenue performance to continue to be solid, tracking above the level of inflation. The city has ample legal ability to independently raise revenues.

Expenditure Framework: 'aa' factor assessment

The city's rate of expenditure growth is expected to be in line with revenue growth. Expenditure flexibility is solid, with moderate carrying costs for debt service, pension, and other post-employment obligations.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden including pension liabilities and overall debt is moderate relative to personal income and expected to remain at this level.

Operating Performance: 'aaa' factor assessment

Extremely strong gap-closing capacity reflects ample revenue raising ability, solid expenditure flexibility, strong reserve funding, and prudent budget controls. Management makes consistent efforts to support financial flexibility at times of economic recovery.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in revenue and expenditure flexibility and expectations for the continuation of solid economic and revenue growth.

CREDIT PROFILE

The city's economic base is anchored by the Cleveland Clinic Foundation, parent institution of the Cleveland Clinic, which ranks among top taxpayers and is the city's single largest employer. The city continues to benefit from its status as a regional employment hub, with large-scale residential and mixed use properties currently in development.


The city maintains a strong socioeconomic profile, with per capita income about double the state average. The city's poverty rate is very low and educational attainment remains very high, underscoring the educational demands of the local economy.

Income taxpayer concentration is high, as the top 10 employers constitute approximately a third of the city's fiscal 2016 employment base.


Revenue Framework

The city's revenue comes largely from income taxes, which made up 77% of FY 2015 general fund revenue. The remainder is comprised of charges for services, other miscellaneous revenue, and a comparatively small amount of property taxes (6%).

Historical revenue growth is solid, above the level of inflation. When adjusting for an income tax levy increase in 2011, the 10-year compound annual growth rate (CAGR) is about 2.4%. Continuous economic investment, including the expansion of the Cleveland Clinic, the construction of an Aligned Health Center facility and the addition of new national hotel and retail chains, reinforces Fitch's expectations for future revenue growth. However, income taxpayer concentration may expose the general fund revenue stream to volatility in the underlying economy. Management conservatively projects income tax revenues to show annual gains of at least 2.5% for 2017 and 2018, due to wage growth and increased employment opportunities.

Ohio state law limits un-voted income and sales taxes. Property tax levy 'inside mills' may be adjusted by the county, without receiving voter approval, up to 10 mills. The city is well below the inside mill threshold and may legally increase property tax levy by $3.8 million, or approximately 10% of general fund revenues, through this flexibility alone. In addition, since the city pays for non-enterprise-fund debt service from income tax revenues, it has the legal ability to independently raise property tax revenues equal to 100% of general obligation debt service, or about 4% of general fund revenues. Although as a policy matter the city is unlikely to need to take this action, the ability to do so provides significant flexibility and supports a strong revenue framework assessment.


Management also has the legal ability to eliminate a 100% income tax credit given to the city's non-resident labor force. This would generate about $6.6 million in income tax revenues or approximately 17% of general fund revenues. The city also has the ability to raise charges for fees and services.


Expenditure Framework

Beachwood's primary expenditure category is public safety, which comprises approximately 46% of general fund expenditures. Administrative service costs are the second largest expenditure category, equal to about 27% of general fund expenditures.


Fitch expects the natural pace of spending growth to be generally in line with the natural pace of revenue growth, with cost pressures expected to largely be driven by public safety salary increases at approximately the rate of inflation.


The city's expenditure controls are solid. Fiscal 2015 carrying costs for debt, pension, and other post-employment benefits (OPEB) are equal to about 14% of government spending, with pension totaling about 50% of the cost. Budgeted expenditures for 2017 are expected to increase modestly despite the inclusion of manageable salary increases. Beachwood has five local union contracts, all of which are re-opening for negotiations at the end of 2017. All contracts are settled on a three-year term. Fitch expects that management will maintain reasonable negotiating terms.


Management has identified additional areas of expenditure flexibility, equal to about 6% of general fund expenditures, which include the delay of non-essential capital projects and prolonging the life of equipment. Fitch does not expect the city to need to implement these expenditure saving mechanisms given other budgetary controls available.


Long-Term Liability Burden

The city has a moderate long-term liability burden with debt plus Fitch-adjusted unfunded pension liabilities totaling about 10% of personal income. About 40% of the burden is attributable to overlapping debt, with direct debt ($19 million) equaling another 20% of the liability. Direct debt is scheduled to amortize at a rapid pace, with about 87% retired within the next 10 years. The city has plans to issue an additional $7 million in general obligation debt during 2018 for the construction of a new fire station. Fitch expects the tax-supported debt burden will remain moderate.


Beachwood provides pension benefits and OPEB through two state-sponsored defined benefit pension plans, the Ohio Public Employees Retirement System (OPERS) and the Ohio Police and Fire Pension Fund (OP&F). The combined plans reported an assets to liabilities ratio of 79%, assuming an 8% rate of return, as of Dec. 31, 2015. Using Fitch's more conservative 7% rate of return, the estimated funded ratio is 70%.


Operating Performance

The city exhibits extremely strong gap-closing ability and is expected to maintain strong operational management during times of future economic decline. Financial resilience comes from a combination of ample revenue-raising flexibility and closely managed expenditure controls, supplemented by the city's maintenance of a high reserve cushion.


Management has built reserves to very high levels (65% of expenditures and transfers out at fiscal 2015 year-end), noting the economic sensitivity associated with the heavy reliance on income tax revenue. In addition, the city has a formal general fund balance that management expects will further safeguard their financial position. This policy requires that unrestricted balances are maintained at a minimum of 50% of general fund expenditures and transfers out.

Additional information is available on www.fitchratings.com

Additional Info...
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