Fitch Rates Columbus (OH) $275MM GO Bonds 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Columbus, Ohio general obligation bonds:
--$250.5 million various purpose unlimited tax GO refunding bonds (ULTGOs) , series 2016-1;
--$25.2 million various purpose limited tax (LTGOs) refunding bonds, series 2016-2.
Proceeds of the bonds will be used to refund selected maturities of outstanding voted and unvoted bonds of the city.
The bonds are scheduled for negotiated sale on February 11.
The Rating Outlook is Stable.
The ULTGO bonds are secured by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount. The LTGO bonds are secured by the city's full faith and credit and its ad valorem tax, subject to the 10-mill limitation.
KEY RATING DRIVERS
DEEP AND DIVERSE ECONOMY: The city's diversified economy benefits from an extensive government, university and healthcare presence.
SOLID FINANCIAL PROFILE: Proactive and effective financial stewardship including a timely income tax rate increase in 2009 has resulted in ample reserve levels and financial flexibility.
MANAGEABLE LONG-TERM OBLIGATIONS: The aggregate debt burden is elevated but manageable, characterized by above-average principal amortization, affordable carrying costs and reasonable future capital needs.
STRONG FISCAL MANAGEMENT: The rating is sensitive to the maintenance of the strong fiscal management and budgeting practices that underscore Columbus' solid financial profile. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
Columbus, the state capital, is located in the central part of the state within the boundaries of Franklin County and, to a limited extent, Fairfield and Delaware counties.
The city's population continues to increase, growing by 6% from 2010 to 2014. Residents are relatively well educated, with 35% of the adult population attaining higher education versus 30% for the national average. Wealth levels are slightly below average with per capita income at 93% and 86% of the state and national medians, respectively, but are negatively skewed by the large Ohio State University (OSU) student population (approximately 58,000).
Columbus is anchored by a stable and growing economic base largely composed of professional and business services, healthcare, education, and government. As the state capital and home to OSU, the city's economy remained relatively resilient during the most recent national recession.
Significant facilities investment by OSU, Nationwide Children's Hospital, and IBM Corporation are expected to add to the city's expanding employment base. The city's employment profile remains positive. The December 2015 unemployment rate of 3.8% is below the state (4.6%) and the national (4.8%) rates. The December 2015 rate matches the level recorded a year prior.
AMPLE FINANCIAL FLEXIBILITY; SOLID RESERVES
The city's financial position materially improved with the passage of a permanent 25% increase in the city's income tax levy to 2.5% from 2% effective October 2009. Income tax rates of cities and villages within the state of Ohio are limited to a maximum of 1%, unless specifically approved by a majority of resident voters. Income tax revenue has increased an average of 4.4% annually from 2011 to 2014 and is the largest general fund revenue component, accounting for 76% in 2014. Approximately 85% of income taxes are collected through employer withholdings.
The city generated a small general fund operating deficit after transfers of $2.3 million, or less than 1% of spending, in 2014 (year-end Dec. 31). General fund income tax revenues increased by $17.9 million (3.2%) but this was offset by a decrease in state shared revenue and a 3.9% increase in expenditures. The unrestricted fund balance at year-end totaled $137.3 million or a solid 17.5% of spending compared to $139.6 million or 18.5% of spending at Dec. 31, 2013.
The city also retains substantial unrestricted reserves in its special income tax debt service fund (SIT) fund, which totaled $175 million at 2014 year-end. This balance represents an additional cushion equivalent to 22.3% of general fund spending. Although the city does not intend to access the SIT reserves for operating relief, there are no restrictions on its usage. The SIT account is funded by the city's long-standing policy of allocating 25% of total income tax revenues to the SIT fund, and such funds are traditionally used to pay non-enterprise-supported GO debt service.
Preliminary 2015 general fund revenue, reported on a budgetary basis, totals $785 million, an increase of 2.5% from 2014 revenue. Income taxes were budgeted to increase 3.5% over 2014, which Fitch considered reasonable given past growth trends. The city anticipates year-end 2015 GAAP results to be on par with 2014.
The proposed 2016 budget assumes a 3.9% increase in income taxes, a modest 2.5% increase from 2015 total revenue and expenditure projections, and a modest net operating surplus. Year-end fund balance estimates are currently projected at approximately $134.4 million or 17.1% of 2014 general fund spending.
Given the city's history of conservative budgeting and expected deposits to the economic stabilization/rainy day fund (RDF) which is a component of the unrestricted general fund balance, Fitch expects the city will maintain structural balance. Pursuant to an updated 2013 resolution, the city plans to continue to replenish the RDF to $75 million by 2018 year-end. As of Dec. 31, 2014 there was $64.1 million in the RDF and the city has budgeted an additional $2.2 million in both 2015 and 2016, which would bring the balance to approximately $69 million by 2016 year-end.
MANAGEABLE LONG-TERM OBLIGATIONS
The city's overall debt burden is moderate at $2,953 per capita but weaker relative to market value at 6%. However, none of the city's debt is actually paid from property taxes, but rather from SIT or enterprise funds. Payout of GO debt is average, with 71% repaid within 10 years taking into account the current issue.
The city limits borrowing in accordance with its internal debt affordability policies and has no exposure to derivative risk. Columbus' large $2 billion capital improvement plan primarily addresses environmental mandates for the city's sewerage system and is expected to remain self-supporting from utility fees and charges.
Voters authorized $842 million of additional borrowing at the November 2013 election, bringing the amount of authorized, unissued debt to approximately $458.3 million, post-sale. Officials anticipate issuing the debt over the next four years, with all debt service to be supported by enterprise or income tax revenues. In the near term, management expects to seek voter authorization of a new bond referendum in November of 2016. The par amount has yet to be determined. In addition, the city has $269.3 million of debt issuance available under a 2008 authorization specifically for sanitary sewer projects. The city has a favorable record of voter support for debt, with 100% of referenda approved since 1985. Debt service equaled an affordable 11.7% of governmental fund spending in fiscal 2014. Fitch expects the tax-supported debt burden will remain manageable due to the city's historically prudent use of available debt capacity.
Columbus provides pension benefits and other post-employment benefits (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 larger of the plans, OPERS, reported a funded ratio of 83.8% as of Dec. 31, 2014. Using Fitch's more conservative 7% rate of return, the estimated funded ratio is 75.5%. The city continues to fund 100% of its required annual pension contribution (APC).
Historically, the city paid the employee's portion of the pension contribution in addition to the city's APC payment (pension pick-up). The city has been negotiating phase-out of this practice in recent labor contracts. All negotiated contracts now include provisions to gradually reduce the pension pick-up, resulting in material pension cost savings which should keep future increases more manageable. Carrying costs for debt service, pension ARC, and OPEB amounted to a moderate 18.8% of governmental fund spending in 2014, excluding the portion of the employees' costs that the city covered. Including those costs, the figure rises to a still moderate 20.3%.