News Column

Fitch Affirms Norton, Ohio's LTGOs at 'A+'; Outlook Stable

August 6, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the following ratings on Norton, OH (the city):

--Approximately $6.7 million outstanding general obligation limited tax (LTGO) bonds at 'A+';

--Implied unlimited tax general obligation (ULTGO) rating at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are unvoted obligations of the city, payable from the levy of an ad valorem tax on all property within the ten-mill limitation imposed by Ohio Law.

KEY RATING DRIVERS

STABLE BUT LIMITED ECONOMY: The city's economy is stable but limited, characterized by concentration in the auto sector.

RELIANCE ON INCOME TAX: The city's finances are reliant on economically sensitive and somewhat concentrated income tax revenues which have shown solid growth over the last few years but leave the city's finances vulnerable during downturns.

CONSERVATIVE MANAGEMENT; HEALTHY RESERVES: The city's conservative budgeting and prudent financial policies have resulted in strong reserves and adequate financial flexibility, somewhat offsetting concerns about exposure to income tax volatility.

MANAGEABLE LONG-TERM LIABILITIES: The city's debt profile is a credit positive, with low debt levels, limited capital plans, and manageable pension and other post-employment benefit (OPEB) costs.

LTGO AND IMPLIED ULTGO RATINGS ON PAR: Fitch currently makes no distinction between the implied ULTGO and LTGO ratings. However, erosion in taxing capacity or financial flexibility may result in future rating differentiation.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and healthy fund balance levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Norton is a suburb of Akron located in the counties of Summit and Wayne in northeast Ohio. The city is 40 miles south of Cleveland and five miles southwest of Akron. The city's population increased by 4.8% from 2000 to 2010, and has remained stable since with a current population of approximately 12,050.

STABLE BUT CONCENTRATED ECONOMY

The city's employment base is concentrated in the automotive industry with major employers and taxpayers including a large car dealership -- Fred Martin Motors -- and B&C Corporation/JR Wheel, a manufacturer of aluminium wheels. Since 2010, the financial health of Fred Martin Motors has improved following a renovation and expansion project. The project included the additions of a Fiat dealership and a 12,000 square foot car wash/oil change business. B&C Corporation/JR Wheel filed for bankruptcy in 2010. After settling a contract dispute with Alcoa, one of the firm's largest customers, the restructured JR Wheel is once again one of the city's major employers, manufacturing aluminium wheels on a new mechanized plant designed for multiple manufacturers and car models.

Unemployment figures for the city are not available. Akron and Summit county unemployment rates for May 2014 were 4.9% and 5%, respectively, an improvement from May 2013 rates of 6.8% and lower than the state (5.3%) and U.S. (6.1%). The improvement appears to be due to a combination of year-over-year employment growth (1.6%) and a drop in the labor force (-0.3%). Norton's income indicators as reflected in per capita money income are comparable to state and U.S. averages. The poverty level is half of county, state and U.S. levels.

STABLE PROPERTY TAX BASE DESPITE ASSESSED VALUE DECLINES

Property tax revenues account for only 6% of general fund revenues. Taxable assessed valuation in 2012 declined to $245.4 million, a 10.9% drop since 2007 due to the phase out of tangible personal property and a revaluation. For 2013, assessed value has remained stable. The tax base is diverse with the top 10 property taxpayers comprising 4.8% of assessed value. Total property tax collections averaged 100% over the last three years. Property tax rates are primarily composed of continuous levies, which Fitch views positively as there is no renewal risk. Proceeds from voted levies are accounted for in separate funds (Fire/EMS) to reflect voter restricted uses. In November 2012, voters approved by 57% a five-year 4.6 mill levy for EMS/Fire which generates approximately $1.1 million annually.

STABLE REVENUE ENVIRONMENT AND PRUDENT MANAGEMENT AID HEALTHY RESERVES

General fund revenue trends are driven by income tax which comprises approximately 71% of general fund revenues. The city levies a 2% income tax on all who reside or work in the city with a 1.5% tax credit for those who have to pay income tax to another municipality. Income taxes are also levied upon the net income of corporations and other business entities. The tax is collected and administered by the city. For 2013, the top 10 income tax payers represented 27.8% of total income tax receipts, with the largest payer accounting for 5.2%. The payers are a mix of government entities (on behalf of employees) and commercial and manufacturing businesses.

The city recorded general fund operating surpluses after transfers of $957,000 (18.1% of spending) and $202,000 (3.4% of spending), in 2012 and 2013 (year-end Dec. 31), respectively. Positively, general fund income tax receipts increased by 3.5% in 2012 and 2.3% in 2013. The city ended 2013 with a $3.8 million unrestricted general fund balance, a fairly small dollar amount but equivalent to a strong 64% of general fund spending. For 2014, management reports that year-to-date results are positive. Through May, income tax receipts were up 2.5% compared to 2013. The 2014 budget calls for a slight general fund drawdown but management is currently projecting a small surplus with no drawdown anticipated.

Fitch believes the city will face financial pressure given its high reliance on economically sensitive income tax revenues. Offsetting this concern are the city's prudent management practices including conservative budgeting and past history of controlling expenditures. Fitch expects the city will retain sufficient reserve levels to provide adequate financial flexibility at the current rating level.

MANAGEABLE LONG-TERM LIABILITIES

City debt ratios remain low due to internal funding of capital projects. Overall net debt equals $850 per capita and 1.5% of taxable market value. Debt levels should decline given no borrowing plans and above-average amortization with 61% of debt retired in 10 years.

The city provides pension benefits through state administered plans and funds 100% of its actuarial required contributions. The largest state retirement fund, OPERS, reported an 80.9% funded ratio as of Dec. 31, 2013, and is adequately funded at an estimated 73%, using Fitch's more conservative 7% rate of return assumption. Total cost of carry inclusive of debt service, pension, and OPEB costs are moderate at 19.1% of governmental spending in 2013.

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

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated 14 Aug 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated 14 Aug 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

U.S. Local Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=845754

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Karen Wagner, +1 212-908-0230

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

George Stimola, +1 212-908-0770

Analyst

or

Committee Chairperson

Amy Laskey, +1 212-908-0568

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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