Fitch Ratings takes the following rating action on Cleveland-Cuyahoga County Port Authority, Ohio - Regional Income Tax Agency project (RITA):
--$12.38 million outstanding development revenue bonds, series 2004 (RITA project) affirmed at 'A-'.
The Rating Outlook is Stable.
SECURITY:
The bonds are special obligations payable solely from rental payments made by the Regional Council of Governments (RCOG), acting through RITA, to the Cleveland-Cuyahoga County Port Authority. Rental payments are payable from net revenues of RITA, subject to annual appropriation. RITA revenues are derived from a percentage of funds retained from the collection of local income taxes on behalf of Agency members. There is a leasehold interest in RITA's HVAC system, computer equipment, computer software, and certain other furnishings. The bonds are also secured by a cash funded debt service reserve equal to the IRS standard, currently $1.67 million.
KEY RATING DRIVERS:
ESSENTIAL MUNICIPAL SERVICE: RITA, created under state statute, provides an essential service of local income tax collections on behalf of its Ohio municipal members. However, member retention is reliant upon RITA's competitive fee structure, efficient tax collection and dispersion procedures, and continuing municipal income taxation.
STABLE MEMBERSHIP AND REVENUES: Both membership and tax revenue collections have increased in recent years, providing a healthy revenue stream to support RITA operations and debt service. Given the wide dispersion of RITA membership across the state, RITA benefits from the strength and diversity of the statewide economy (GO rated 'AA+' with a Stable Outlook by Fitch).
SOUND REVENUE STRUCTURE: RITA operates on a cost-recovery basis whereby expenses are deducted prior to monthly remittance of net income tax revenues to its members. Fitch believes RITA has significant flexibility to adjust its fees to compensate for potential declines in tax revenue collected and still remain competitive.
RAPID DEBT AMORTIZATION: Principal amortization is rapid with 46% repaid within five years and all repaid by 2022. Future capital needs will be internally funded.
LESS ESSENTIAL LEASED ASSETS: Lease rental payments are subject to RITA's annual appropriation, are payable primarily from an economically sensitive tax, and are secured by less than essential pledged assets.
WEAK LEGAL PROTECTIONS: Bondholder protections are limited, as there are no limitations on additional debt (although none is envisioned), and a state takeover of local income tax collections would not be considered a contract impairment.
RATING SENSITIVITIES
STABLE MEMBERSHIP AND SOUND OPERATIONS: The rating is sensitive to shifts in fundamental credit characteristics including the agency's stable membership which supports sound financial performance. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
CREDIT PROFILE:
ESSENTIAL PROVIDER OF INCOME TAX COLLECTION SERVICES
The Regional Council of Governments (RCOG), acting through RITA, was organized in June 1971, and administers income tax collection and enforcement on a voluntary basis for over 233 municipalities in 66 counties throughout Ohio as of January 2015. RITA collects local income taxes for its members and retains a percentage of taxes collected, usually 3%, to fund operations and pay debt service. The RCOG is authorized to amend or adjust the withholding percentage from its members, up to 5%, to mirror changes in the agency's administration costs. Any excess retainer is refunded to its members and conversely any shortfall is recovered the subsequent year. Costs are allocated to each of the members based on its proportion of transactional volume and tax receipts. Bond proceeds were used to purchase the leased assets.
STABLE MEMBERSHIP AND MARKET SHARE
Members may withdraw from the RCOG effective Dec. 31 of any year unless the member repeals its income tax, in which case the withdrawal becomes effective upon final settlement of funds collected. The number of municipalities served by RITA has consistently increased over the past decade from 86 members in 2000 to 180 in 2010 and 233 in 2014. Since the agency's inception, less than 10 municipalities have left, including three members that have since rejoined.
RITA's primary competition is self-collecting municipalities who, in the aggregate, collected over 50% of all Ohio local income taxes since 2009, followed by the cities of Columbus and Cleveland which each collected 9% while acting as collection agents for themselves and other municipalities. RITA has been able to maintain its market share of income tax collections at over 20% for the past six years.
INCREASING COLLECTIONS; SOME CONCENTRATION
Income taxes collected by RITA have increased steadily from $541.4 million in 2005 to approximately $1.1 billion projected for 2014. RITA retained approximately $17.7 million or 1.67% of the aggregate 2013 tax collections to pay its expenditures, including $2.1 million for debt service. Since 2000, the agency has annually retained between 1.67% and 2.7% of total tax collections to fund its operations. The city of Youngstown, the largest member in terms of income tax revenues, accounted for roughly 4.2% of the total 2013 collections and the top five municipalities accounted for 16%.
COMPETITION AND LEGISLATIVE CHANGE RISK
The State of Ohio collects certain other taxes including the state income tax and taxes relating to income earned by utility companies. Periodically there has been discussion at the state level regarding state collection of the local income tax and other changes; however, it appears RITA's cost of collection of under 2% is materially lower than that of the state, which based on anecdotal information, charges roughly in the 4%-5% range for other tax collection services and lower than the cost for members to undertake collection operations.
MANAGEABLE EXPENSES AND LIABILITIES
RITA's annual operating expenses have ranged between $15 million-$18 million over the past five years, dominated by personal service costs which comprise over 60%. Budget growth has primarily been driven by a modest number of additional employees given membership growth. Annual lease payments are a moderate 10% of annual expenses and RITA maintains significant flexibility to increase revenues if needed.
RITA provides employment benefits to its employees including pension and other post-employment benefits (OPEB). The agency participates in a state sponsored plan (OPERS), and has contributed its actuarially required contribution ($1.1 million in 2013) for at least the last three years. OPEB is offered to qualifying retirees and their dependents as a monthly healthcare stipend until the beneficiary reaches Medicare eligibility, also through OPERS. RITA paid $81,670 for OPEB costs in 2013. Total carrying costs in 2013 for lease debt service, pensions and OPEB was a moderate 18%.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 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=965595
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