2008-09-17 23:31:02 -

- Fitch Ratings has assigned an 'A+' rating to the following Cleveland, Ohio (the city) issues:

--$10,400,000 final judgment general obligation (GO) bonds, series 2008A;

--$13,500,000 various purpose GO refunding bonds, series 2008B;

The bonds are expected to price via negotiation on Sept. 23rd. Both ad valorem property taxes within the 10-mill property tax limitation and municipal income taxes pledged under the city's general bond ordinance secure the bonds. Series 2008A will finance the settlement of claims and final judgments and series 2008B will refinance outstanding GO debt. Fitch also affirms the 'A+' rating on approximately $337 million of outstanding GO debt. The Rating Outlook is Stable.

The 'A+' rating is based on the city's continued

progress in diversifying its economy, satisfactory, though strained financial performance, and manageable debt levels which should remain moderate given practical limitations to fiscally support additional debt. Financial margins are narrow and credit stability will depend on officials' ability to manage increasing fixed costs and maintain adequate reserves levels, given the limited revenue raising ability. City income taxes provide the majority of general fund revenue and provide stability as other major general fund revenue sources stagnate. The city levies a 2% income tax on city and non-city residents which is projected to generate roughly $286 million in fiscal year 2008 (net of receipts restricted for capital improvements and debt service), an increase of 2.1% over the fiscal year 2007 budget. Despite increasing unemployment rates for the city, Cleveland remains the employment hub for the region and the ability to capture income taxes from residents outside the city's corporate limits as well as non-resident workers in the city is an important credit consideration.

Cleveland, with a 2007 estimated population of 438,042, has diversified its economy in the last two decades from significant dependency on durable manufacturing toward the services industries, particularly education and healthcare. Roughly 13% of regional workers are employed in the manufacturing sector in 2007, down from more than 17% in 2000. The education and healthcare sector is up to 16.2% in 2007, from 13.2% in 2000. Similar to national economic trends, city unemployment was up to 7.7% in 2007 from 7.2% in 2006 and recent monthly trends suggest further deterioration. The largest employers are diverse and include the Cleveland Clinic and University Hospitals Health System, both of which are in expansion modes or have recently expanded. Although KeyCorp and National City Corp have announced layoffs, city officials indicate that the corporate centers located in the city are largely unaffected.

Cleveland's financial performance has been mixed over the last decade marked by sizeable general fund net deficits in 2001 and 2003. Improved operations in fiscals 2004 and 2005 grew the unreserved general fund balance to $24.7 million and enabled officials to begin to restore the balance in the rainy day reserve fund. Although the overall and unreserved general fund balance was reduced slightly in fiscal year 2006 and more substantially in fiscal 2007, deposits continue made to the rainy day reserve which reached $7.2 million at the close of fiscal 2007. This, in addition to the unreserved fund balance brings total available general fund reserves to $24.5 million, equal to 4.9% of general fund spending. Year-to-date performance for fiscal 2008 suggests that the overall fund balance will decline despite a $1 million deposit to the rainy day reserve and increased income tax revenues. Ad valorem taxes are projected to be down for fiscal year 2008, the result of a 5% assessed valuation decline, driven largely by the phase out of the tangible personal property assessment. Several factors continue to pressure operations including rising salaries, workers compensation claims and premiums, and retirement and healthcare contributions made to the state retirement system on behalf of city employees. Most of these costs are fixed and the city is limited in its ability to generate offsetting revenues. To address these issues the city established an operations efficiency tax force. The tax force has been successful to reduce expenditures, including reducing ongoing expenditures by $16 million in fiscal year 2006. Although the task force remains in place, future efficiencies will become increasingly difficult and officials will be pressed to maintain flexibility within tight fiscal margins. Significant deterioration of general fund reserve levels could have a negative impact on the city's rating.

The city has a moderate direct debt burden, equaling $1,452 per capita and 3.6% of market value. The debt includes certificates of participation issued for the football stadium and pension-related income tax bonds. About 63% of tax-supported debt is retired in 10 years. Including overlapping debt of the Cleveland school district and Cuyahoga County, total debt equals $1,986 per capita and a high 5.0% of market value. The city plans to issue approximately $30 million of additional GO debt in fiscal year 2009. The capital improvement program (CIP) indicates the need to issue roughly $45 million in GO debt annually which officials believe is unlikely given the absence of fiscal resources to support the additional debt service.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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