Cleveland (City of) OH -- Moody's assigns A1 rating to the City of Cleveland's (OH) $18.5 million GO Refunding Bonds, Series 2012A and an A1 rating to the city's $15.5 million Subordinate Lien...

New York, November 08, 2012 -- Moody's Rating

Issue: General Obligation Refunding Bonds, Series 2012A; Rating: A1; Sale Amount:$18,500,000; Expected Sale Date: 11/30/2012; Rating Description: General Obligation

Issue: Subordinate Lien Income Tax Bonds, Series 2012; Rating: A1; Sale Amount:$15,500,000; Expected Sale Date: 11/30/2012; Rating Description: Special Tax: Non-Sales/Non-Transportation

Opinion

Moody's Investors Service has assigned an A1 rating to the City of Cleveland's (OH) $18.5 million General Obligation Refunding Bonds, Series 2012A, and an A1 rating to the city's $15.5 million Subordinate Lien Income Tax Bonds, Series 2012. Concurrently, we have upgraded to A1 from A2 the city's $162.7 million outstanding subordinate lien income tax revenue bonds, affirmed the A1 rating on the city's $320 million outstanding GOLT debt, and affirmed the A2 rating on the city's $58.5 million of outstanding non-tax revenue debt and $54.7 million of outstanding Moody's-rated certificates of participation. The outlook remains stable.

SUMMARY RATING RATIONALE

The Series 2012A GOLT bonds are secured by the city's full faith and credit taxing authority, subject to the ten mill limitation defined by Ohio state law, and enhanced by a senior lien on the city's gross income tax receipts pursuant to a 1980 city ordinance. Proceeds will be used to refund certain maturities of Series 2003 and 2005A bonds for a net present value savings. The Series 2012 Subordinate Income Tax Revenue Bonds are a special obligation of the city secured by a subordinate lien on the city's gross income tax receipts. Proceeds of this issuance will be used to construct and equip a new district police station and city-wide communication center.

Assignment and affirmation of the A1 rating on city's GOLT debt is based on the city's improving financial position following the near-depletion of General Fund reserves and liquidity in fiscal 2009; dependence on economically sensitive revenue sources, namely municipal income tax collections; local economy that remains challenged but benefits from the presence of a strong health care industry and significant economic redevelopment efforts; weak demographic profile including high unemployment and a multi-decade trend of sizeable population losses; and debt position that is expected to remain manageable, with moderate exposure to the risks associated with variable rate debt and interest rate swap agreements. Assignment and upgrade to A1 of the city's subordinated income tax revenue bonds reflects the city's overall credit fundamentals, the nature of the pledge, the legal structure, and the sizable debt service coverage providing security for these bonds.

STRENGTHS

* Significant recovery of income tax collections in fiscal 2011 and projected for 2012, following multi-year declines

* Considerable economic stability provided by the region's health care and higher education institutions

* Major revenue stream benefits from stronger socioeconomic characteristics of the broader metro area, with approximately 85% of income tax receipts paid by non-residents of the city

*Sizable debt service coverage for both GOLT and subordinate lien income tax bonds

CHALLENGES

* Modest General Fund liquidity and fund balance following substantial reductions in fiscal 2009

* Reliance on economically sensitive income tax collections for the majority (56% in fiscal 2011) of General Fund revenues

* Weak socio-economic profile, including a multi-decade trend of population loss and median resident income levels that have steadily declined relative to those of the state and nation

Outlook

The outlook on the City of Cleveland is stable, representing our expectation that the city's financial position, economic profile, and debt program will remain consistent with the A1 rating category. Although the city remains vulnerable to due to its reliance on income tax revenues, state aid, and other pressured revenue sources, we expect that the city will achieve its projected positive budget variances in fiscal 2012 and make any expenditure reductions needed to maintain its financial position. Our belief that Cleveland's tax base characteristics and challenged socio-economic profile should remain in line with the A1 rating category and that the city benefits from a broader region also supports the assignment of the stable outlook.

What could change the rating - UP

- Substantial improvement of the regional economy with respect to resident income levels, unemployment rates, population trends, and other socioeconomic indices that have historically lagged state and national trends

- Economic development and revitalization efforts that support resumed growth in tax base valuation and income tax revenues

- Implementation of expenditure reductions and/or revenue enhancements that lead to significant growth in reserves and liquidity in the General Fund, Rainy Day Fund, and/or other major operating funds

What could change the rating - DOWN

- Persistent weakness in the regional economy that drives declines in the city's income tax receipts, tax base valuation, and/or socio-economic indices

- Negative budget variances in income taxes and other main revenues and/or an inability or unwillingness to implement corresponding expenditure reductions or alternate revenue generators

- Inability to continue managing the risks associated with the city's variable rate debt and interest rate swaps

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009 and Special Tax Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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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.

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