OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the following bonds to be issued by Hamilton County, OH:

--$376.4 million sales tax refunding bonds, series 2016A.

In addition, Fitch affirms the 'A+' rating on the outstanding sales tax refunding bonds.

The bonds will refund the county's outstanding series 2006A bonds for savings and taken throughout the life of the bonds. The bonds will be sold via negotiation the week of July 11.

Additionally, Fitch has downgraded the county's Issuer Default Rating (IDR) to 'A+' from 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds being rated are payable from a first lien on the receipts of an additional one-half of one percent sales tax and the special funds including a surety funded debt service reserve fund at maximum annual debt service (MADS).

KEY RATING DRIVERS

The 'A+' sales tax rating reflects satisfactory MADS coverage and legal provisions including an additional bonds test requirement of 1.3x MADS. Current pledged revenues provide a strong coverage cushion against potential revenue declines in a moderate economic downturn. The county's use of half cent sales tax revenues after debt service to fund county operations makes it unlikely that this revenue will be overleveraged with additional debt.

The downgrade of the IDR reflects a combination of negative credit factors:, the application of Fitch's revised criteria for U. S. tax-supported ratings released on April 18, 2016, and a prolonged period of negative general fund revenue growth and limited independent revenue raising authority. The county's solid financial performance and healthy general fund reserves are important credit strengths and underscore management's willingness and capacity to make significant expenditure reductions during prior periods of economic stress. Carrying costs for debt and pension are low as is the long-term liability burden including outstanding debt and the unfunded pension liability burden.

Economic Resource Base

Hamilton County includes the Cincinnati-Middletown metropolitan statistical area (MSA), which has developed into a major transportation and industrial center. The economic base is diverse and includes 10 Fortune 500 corporations including Kroger Company, Procter & Gamble, Macy's and AK Steel. The local economy saw significant tax base declines during the recent economic downturn that have only recently started to recover.

Revenue Framework: 'bb' factor assessment

Over the past 10 years revenue growth has been stagnant, lagging behind inflation and GDP. The county has limited independent revenue raising capacity under Ohio's un-voted tax limitation. The county is reliant on economically sensitive sales tax revenue for 36% of general fund revenues. All tax increases outside of the un-voted tax levy require voter approval.

Expenditure Framework: 'a' factor assessment

The county has satisfactory expenditure flexibility and modest carrying costs for debt service and pension liabilities. The county has a strong track record of managing expenditures, but its ability to make additional reductions without cutting services has narrowed given significant expenditure reductions made in prior years.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability burden is modest with pension and debt equivalent to 7.1% of county personal income.

Operating Performance: 'aa' factor assessment

Due to the county's inherent budget flexibility, particularly on the revenue side, Fitch believes the county would likely utilize reserves and reduce spending in a moderate economic downturn scenario. However, ongoing stress could potentially result in cuts to core services, which could pressure the current rating.

RATING SENSITIVITIES

The IDR is sensitive to maintenance of a sufficient level of reserves to offset the county's limited independent revenue raising capacity and has very high revenue sensitivity to periods of cyclical economic decline. The rating on the sales tax bonds is sensitive to changes in sales tax performance and is capped by the county's IDR.

CREDIT PROFILE

The county's substantial economy is anchored by the City of Cincinnati and bolstered by 10 Fortune 500 corporations, the University of Cincinnati, numerous large healthcare institutions, 20 federal government offices including the Internal Revenue Service and Secretary of Defense. Wealth levels are generally above national averages, and population and employment has grown modestly the past five years.

Revenue Framework

The 'bb' revenue framework assessment is based on limited revenue raising capacity and stagnant revenue growth over the past 10 years driven by declining property tax valuations.

General fund revenues have declined by a compound annual growth rate of 1.4% over the past 10 years reflecting shifts in the county's economically sensitive sales taxes and relatively flat property taxes. There was a 10.3% decline in property tax valuations (TAV) from 2011 through 2013 that has only recently stabilized. TAV increased by 0.64% in fiscal 2014 and 2015 combined, reflecting a sluggish recovery in the housing market and general economy. The county collected $235.8 million in property taxes in fiscal 2015, of which $36.5 million or 15.5% is levied for general fund operations; the majority ($198.7 million or 84%) is levied for health and human service levies, a separate county governmental fund that provides essential governmental services.

The county has seen an increase in sales taxes in recent years partially driven by the taxation of Medicaid managed health care providers that have been expanding throughout the state. The federal government is imposing restrictions on the use of Medicaid provider taxes that will require the state to phase out this tax. There is potential for a state solution to minimize the impact to local counties in the next bi-annual budget beginning in fiscal 2017. However, if unaddressed this issue could lead to a reduction in sales tax revenue in fiscal 2017, a possibility that Fitch will monitor closely.

The county has limited independent legal ability to increase revenues as state law limits the county's operating tax levy to 2.26 mills. The county has a number of voter approved property taxes to fund specific programs. Most of the voter approved taxes must be renewed by voters after they expire except one continuing levy (no expiration or renewal risk) for the police information center.

In the event of a sales tax decline due to the elimination of the Medicaid provider tax, the county has 0.25% sales tax capacity remaining that would require voter approval. Under Ohio law a county is permitted to levy several permissive taxes including sales taxes subject to voter approval. While the county maintains the 0.25% permissive tax capacity, there are no voter referendums planned in the near term.

Expenditure Framework

The county has satisfactory expenditure flexibility and moderate carrying costs for debt service and pension liabilities.

The natural pace of expenditure growth is expected to be slightly above revenue growth based on historical and projected trends. Management anticipates increased expenditures in fiscal 2016 including a 3% salary increase ($1.1 million) for one recently negotiated labor contract, but some of the anticipated increase will be for one-time costs including capital expenditures and a legal judgement.

The county has taken many steps to manage expenditure growth including staff reductions, departmental consolidations and closure of under-utilized jail facilities. As the county becomes more operationally efficient its ability to make additional cuts is more restricted. Continued expenditure flexibility will moderate because the county has made significant reductions in prior years. The county has the ability to control headcount under processes outlined in current labor contracts. The majority of the labor contracts are settled, but two contracts are up for renegotiation in fiscal 2016. Management does not anticipate significant changes to current agreements. Carrying costs for pension and debt service are currently low at 7.7% of general fund expenditures

Long-Term Liability Burden

Debt and the unfunded pension liability as a percentage of personal income are low at 7.1%. Overlapping debt of various villages, townships and school districts is the driver for roughly 60% of the liability-to-income metric. The county has limited future borrowing plans and amortizes outstanding principal amortization at a rapid pace of 60% within 10 years.

County employees participate in the Ohio Public Employee Retirement System (OPERS), the State Teachers Retirement System of Ohio (STRS Ohio) (very few employees remaining) and the City of Cincinnati retirement system (CRS) (metropolitan sewer district employees). OPERS and STRS Ohio each administer three separate plans, including a cost-sharing, multiple-employer (CSME) defined benefit plan and a defined contribution plan. The ratio of combined pension assets to liabilities is reported as 83.6% however when adjusted by Fitch to a 7% discount rate is 75.3%. All plans also provide other postemployment benefits (OPEB) for eligible employees that are paid on a pay-go basis.

Operating Performance

In the event of a moderate economic decline Fitch believes the county has adequate reserves to offset the above-average revenue volatility associated with its sales tax revenue and stagnant property tax growth. Fitch considers the county's inherent budgetary flexibility as limited based on its limited revenue raising capability and satisfactory ability to make additional expenditure reductions given the significant cuts and efficiencies made during the prior economic downturn. Fitch believes the county would utilize reserves and reduce spending in a downturn scenario, but ongoing stress could potentially result in cuts to core services.

Available general fund balances have increased to a high 38.1% of expenditures at the end of fiscal 2014, which provides the county solid flexibility to offset the cyclical nature of sales tax collections. The general fund balance is expected to increase by $7.6 million at fiscal 2015 year-end based on unaudited results, which will increase the financial cushion. The county projects a $4.5 million use of the general fund balance to offset the removal of $3.5 million in utility fees from the budget. Based on positive sales tax collections, the county may replenish a portion of the $4.5 million projected draw on reserves.

The health and human services levies fund, which makes up a major portion of the county's governmental funds, increased its restricted fund balance to $25.7 million or 9.3% of fund expenditures in fiscal 2014. The increase was primarily driven by expenditure reductions from improved property tax collections and low expenditures due to the state paying for more Medicaid services because of the ongoing expansion of eligibility. These funds are restricted for health and human services and cannot be used for general fund operations, but they do provide essential county services

Sales Tax Bonds

Pledged one-half of one percent sales tax collections increased by 20% over the past five years, reaching $77.9 million or 1.48x MADS. A portion of the growth was driven by the taxation of the expanding Medicaid Managed Care Organizations that began in fiscal 2010. In fiscal 2015, the county attributed $5.6 million (or 7.2%) of sales tax collections to the Medicaid expansion. The federal government is in the process of imposing restrictions on local government's abilities to tax Medicaid providers. Natural sales growth should improve based on improving economic conditions indicated by three years of growing employment including a 2.3% in 2014 and modest increases in personal income.

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the county's 10-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 3% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues was an 8.6% decline from fiscal 2008-2009. Based on current debt service coverage levels, which are above what the ABT would allow, the structure could tolerate a 32% drop in revenues before MADS coverage falls below 1.0x.