CHICAGO — Fitch Ratings on Wednesday downgraded Cleveland to A-plus from AA-minus, warning that the city’s reserves are depleted as it faces fiscal challenges.

Chief among the issues confronting the the Ohio city are proposed cuts in local government aid under Gov. John Kasich’s recently unveiled two-year budget proposal.

Fitch’s negative credit action affects $248 million of outstanding limited-tax general obligation bonds.

The downgrade was the result of Fitch’s regular surveillance of the city, which it last reviewed in 2009, according to analyst Karen Wagner.

Cleveland plans to enter the market in early May with $32 million of GO bonds to finance various capital projects.

“I don’t anticipate that this downgrade will really affect the marketing of the bonds,” said Elizabeth Hruby, Cleveland’s debt manager. “GO rates are the strongest part of the municipal market right now.” 

Stifel, Nicolaus & Co. is underwriter on the upcoming issue. The city last issued GO debt in 2009.

Moody’s Investors Service rates the Cleveland’s GO bonds A1 with a stable outlook. It downgraded the city last year to A3 from A2 and assigned a negative outlook, later revising the rating up to A1 as part of an agency-wide ratings recalibration.

Standard & Poor’s rates the city’s general obligation debt AA with a stable outlook.

Cleveland does not have any unlimited-tax GO debt. Its GO bonds are backed by both a general obligation pledge and an income-tax pledge, which is its chief revenue source.

Like most cities across Ohio, Cleveland’s weak economy has meant a drop in income tax revenue. In fiscal 2009, after it was hit by an unexpectedly high 8.5% decline in income-tax collections, the city opted to deplete reserves. 

Officials attempted to stabilize operations in fiscal 2010 by implementing a mix of cuts, salary freezes, and revenue enhancements, including a garbage fee, Fitch’s Wagner said in the downgrade ­report.

The measures generated $15 million for the city’s general fund. Income-tax collections also stabilized and grew, coming in $1 million over budget for the year.

Despite management’s positive actions, however, Fitch said Cleveland will likely continue to be challenged amid a weak regional economy and the reductions in state aid.

Hruby acknowledged depleted reserves but said the city’s fiscal position was rebounding.

“We’ve balanced our budget and handled difficult situations recently and are definitely seeing some upturns here,” the debt manager said. “We have a lot of big projects and feel we’re well positioned for the year.”

Kasich’s proposed state aid cuts would mean Cleveland would face deficits of $16 million in 2012 and $24 million in 2013, Fitch said.

State aid makes up just under 10% of the city’s general fund revenues.

“The cuts add an additional hurdle to re-establishing stable finances given financial flexibility and revenue raising capabilities are limited,” Wagner said.

“On the positive side, there is potential for additional revenue from economic development projects, the city has settled contracts with most of its large unions on favorable terms, and the rainy day fund remains intact at $8.5 million,” according to the Fitch analyst

Other credit strengths include a moderate debt burden and the city’s relative success in mitigating fallout from the decline in the manufacturing industry by building strong health-care and education sectors, analysts said.

Cleveland also continues to make 100% of its annual required contributions to the state’s pension systems and to finance its other post employment benefits, Fitch said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.