Fitch Affirms Shaker Heights, OH's LTGOs at 'AAA'; Outlook Stable

Fitch Ratings affirms the 'AAA' rating on the city of Shaker Heights, OH's (the city) $17.1 million limited tax general obligation (LTGO) bonds.

In addition, Fitch affirms the implied unlimited tax general obligation (ULTGO) rating at 'AAA.'

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are full faith and credit general obligations of the city payable from ad valorem property taxes within the 10-mill limitation imposed by Ohio law.

KEY RATING DRIVERS

STRONG MANAGEMENT AND RESERVES: Prudent financial management has historically resulted in positive operations and high reserve levels.

WEALTHY COMMUNITY: The city benefits from an affluent local economy reflected in high wealth levels and below-average unemployment.

REASONABLE LIABILITY BURDEN: Debt levels are below average, and future debt needs for capital are modest. Carrying costs for debt service and post-retirement obligations are affordable.

STRONG FINANCIAL FLEXIBILITY: The city's high level of overall financial flexibility supports the 'AAA' for both the implied ULTGO and LTGO ratings. The financial profile is characterized by strong liquidity and reserves, as well as strong voter support for revenue-raising initiatives.

RATING SENSITIVITIES

CHANGES TO FINANCIAL PROFILE: The 'AAA' ratings are sensitive to the city's continued ability to maintain structural budgetary balance and adequate reserves.

CREDIT PROFILE

Shaker Heights is a fully developed and affluent residential suburb located 10 miles southeast of downtown Cleveland.

AFFLUENT CLEVELAND SUBURB

Access to an extensive transportation network, a variety of health, cultural, and educational institutions and reputable public and independent schools help attract and maintain a highly skilled and educated workforce. The city's unemployment rate was 3.4% in November, 2015, below the Cleveland metropolitan area and the state. Personal income per capita is well above the national average, reflecting the high educational attainment of residents, 62% of whom have bachelor's degrees.

INCOME TAX DEPENDENT REVENUE PROFILE

The city derived 66% of general fund revenues from income taxes in 2014. The dependence on income taxes rose when voters approved an increase to the rate in late 2012, to compensate for the state-wide elimination of the estate tax. The income tax is levied on individuals' wages and salaries as well as business income. Residents are subject to the tax as well as commuters who work in the city, with residents getting a 0.5% credit for taxes paid if they are employed in other cities. The city's vulnerability to this concentration is mitigated by its strong demographic profile, which should somewhat minimize volatility and strong reserves.

Real estate tax revenue comprised 13% of 2014 general fund revenues.

State funding has declined precipitously since 2011, and now accounts for only 5% of general fund revenues.

AMPLE RESERVES

The city finished 2014 with a $3.2 million general fund net operating surplus (after transfers), equivalent to 7.2% of expenditures, increasing the unrestricted general fund balance to $23.2 million. This represents a strong 51.6% of expenditures and transfers out.

Unaudited cash basis results for 2015 show a $1.3 million net general fund operating surplus after transfers.

The cash basis 2016 budget forecasts a $528,000 net operating surplus after transfers. It assumes a 2% increase in income taxes, a 4% increase in property taxes, 2% wage increases for non-represented and employees with settled union contracts and 0% for employees with expired contracts.

MANAGEABLE DEBT BURDEN

Overall debt levels are fairly low at $1,656 per capita and 2.1% of market value, largely due to considerable overlapping school debt. Amortization is average with 52% of principal repaid within 10 years. Capital needs are manageable.

The city contributes to the Ohio Public Employees Retirement System (OPERS) and the Ohio Police and Fire Pension Fund (OP&F) to fund both pension and other post-employment benefits (OPEB). Both OPERS and OP&F are cost-sharing, multiple-employer defined benefit pension plans. Carrying costs for debt service, pension and OPEB totaled a low 13% of 2014 governmental fund spending and should remain relatively stable given recent pension reform legislation.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope, Lumesis, and IHS Global Insight.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999135

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999135

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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