Fitch Affirms Columbus (OH)'s GO Bonds at 'AAA'; Outlook Stable

Fitch Ratings has affirmed the city of Columbus, Ohio's Long-Term Issuer Default Rating (IDR) at 'AAA'. In addition, Fitch has affirmed the ratings on the following outstanding debt at 'AAA':

--$2.038 billion unlimited tax general obligation (ULTGO) bonds;

--$571 million limited tax GO (LTGO) bonds.

The Rating Outlook is Stable.

SECURITY

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 a 10-mill limitation.

KEY RATING DRIVERS

The 'AAA' rating reflects the city's stable economic underpinnings, exceptionally strong gap-closing capacity, excellent institutionalized financial management practices, and manageable liability burden.

Economic Resource Base:

Columbus, the state capital of Ohio, 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 is anchored by a stable and growing economic base that is diverse and primarily comprised of business services, healthcare, education, and government.

Revenue Framework: 'aaa' factor assessment

Income taxes fund almost 77% of the city's revenues and Fitch expects the city to continue to benefit from solid economic growth. The city has significant independent legal flexibility to raise property tax revenues if needed.

Expenditure Framework: 'aa' factor assessment

Growth in expenditure items is expected to generally keep pace with that of revenues. The city has solid flexibility to control expenses; both carrying costs and the terms of labor contracts are manageable.

Long-Term Liability Burden: 'aa' factor assessment

The city's long-term liability burden is a moderate burden on the economic base. Capital improvement plans are sizeable but the debt burden is not expected to rise materially.

Operating Performance: 'aaa' factor assessment

The city has exhibited strong gap-closing ability during times of recessionary decline. Conservative budgeting practices, including the bolstering of rainy-day fund and unrestricted special income tax debt service fund reserves, have provided additional fund balance resources that, in conjunction with strong budget controls, position the city exceptionally well to address economic downturns.

RATING SENSITIVITIES

Strong Fiscal Management: Failure to maintain strong fiscal management and budgeting practices that underpin Columbus' solid financial profile could result in a rating downgrade.

CREDIT PROFILE

As the state capital and home to Ohio State University, the Columbus economy is resilient. Significant facilities investment by OSU, Nationwide Children's Hospital, and IBM Corporation are expected to add to the city's expanding employment base. Population growth and employment metrics are positive. Wealth levels lag slightly behind the state and national averages, but are negatively skewed by OSU's large student population.

Revenue Framework

The city relies heavily on economically sensitive income tax levies. Property taxes equal only about 5% of general fund revenues.

Historical revenue growth is below U.S. economic performance but above the level of inflation. A growing employment base reinforces Fitch's expectations for future revenue growth.

Ohio state law limits un-voted income and sales taxes. Property tax levies "inside mills" may be adjusted by the county, without receiving voter approval, up to 10 mills. However, since the city pays for non-enterprise fund debt service from income tax revenues alone, it has the legal ability to independently raise property tax revenues equal to 100% of ULTGO debt service, or about 20% of general fund expenditures. Although as a policy matter the city is unlikely to need to take this action, the ability to do so provides significant flexibility and supports a strong revenue framework assessment.

Expenditure Framework

The city's largest expenditure is public safety, which comprises about 70% of total expenditures. Fitch expects that the pace of spending growth is likely to be in line with to moderately above expected revenue growth in the absence of policy action.

The city's expenditure controls are solid. Fiscal 2014 carrying costs for debt, pension, and other post-employment benefits (OPEB) are manageable at 19% of government spending, with debt service alone equaling 12%. Total expenditures are expected to decline in the near term, as the city has been able to find expenditure savings through their very strong working relationship with local unions. Management has successfully negotiated both manageable salary increases and significant pension liability decreases, by gradually rolling off all previously covered employee-contributions.

Long-Term Liability Burden

The city has a moderate long-term liability burden with debt plus Fitch-adjusted unfunded pension liabilities totaling 13% of personal income. Voters authorized $842 million of additional borrowing during the November 2013 election, bringing the current amount of authorized, unissued debt to approximately $519 million. The city plans to issue new debt within the next four years, all of which will be payable from enterprise or income tax revenues. In the near term, management expects to seek voter authorization of a new bond referendum in November of 2016. Fitch expects the tax-supported debt burden will remain manageable due to the city's historically prudent use of available debt capacity and moderately paced amortization schedule, rolling off 79% in the next 10 years.

Columbus provides pension benefits and 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 combined plans reported a funded ratio of 74.7%, assuming an 8% rate of return, as of Dec. 31, 2014. Using Fitch's more conservative 7% rate of return, the estimated funded ratio is 66.4%.

Operating Performance

The city has exhibited strong gap-closing ability after recessionary pressure and is expected to maintain strong operational management during times of future economic decline. Financial resilience comes from a combination of expenditure cutting and revenue-raising flexibility and the city's maintenance of a strong reserve cushion.

An unaddressed moderate economic decline scenario shows an operating reserve cushion that Fitch judges to remain well above the level consistent with an 'aaa' financial resilience assessment. Moreover, Fitch expects that in the event of such an actual revenue decline, the city would continue to maintain reserves at a significantly higher level through active expenditure management.

During the most recent recession the city underestimated income tax revenues, resulting in a net operating deficit, but financial results quickly rebounded due to a voter-approved income tax increase to 2.5% in fiscal 2010, a 25% increase from the prior year. The impact of this rate change results in a revenue sensitivity metric that somewhat understates the baseline sensitivity of the city's revenues to economic downturns. However, Fitch notes that given the city's superior inherent budget flexibility and high reserves levels it is well positioned to address even much higher levels of revenue decline.

Management has worked to mitigate the risk associated with the heavy reliance on income tax revenue by growing unrestricted reserves. General Fund reserves are maintained well above conservative policy guidelines and access to the unrestricted special income tax debt service fund reserves provides an ample financial cushion. Fitch estimates the city's total reserve cushion at about 40% of general fund spending as of fiscal 2014 year-end. In addition, the city exercises conservative institutionalized budgeting practices and has demonstrated a willingness to take responsive policy action during times of economic distress, which lends additional stability though the economic cycle and bolsters the strength of operational performance.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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