CHICAGO – Passage of new and higher income and property tax levies represents a credit-positive development for 21 cities and school districts rated by Moody’s Investors Service.
The 11 that saw their requests rejected on the May 2 ballot “face the possibility of heightened operating challenges, especially those with more limited financial reserves,” Moody’s said in a special commentary distributed Thursday.
Eastlake, which is rated Baa2 with a stable outlook, and Springfield which is rated A2 with a negative outlook will particularly benefit. “Both cities have reported considerable liquidity declines in recent years and the increased revenue has the potential to expand financial reserves,” Moody’s said.
Other local governments that won increases included A1-rated Bedford, Aa2-rated Brunswick, Aa2-rated Heath, Aa3-rated Macedonia, and Aa2-rated Reynoldsburg.
“Although Bedford’s financial position is currently strong, with a fund balance in 2015 equal to 54% of revenue, the recent loss of major employers reduced income tax collections. Income taxes fell nearly 20% in 2015 and the city projected looming budget gaps without new revenue,” Moody’s said.
Voters rejected requests from A1-rated Brookville, A2-rated Marietta, Aa3-rated Napoleon, Aa1-rated Troy.
“Although all four cities have adequate reserves, the negative result is most significant in Marietta, where the general fund balance declined to 16% of revenue in 2015 from 22% in 2011,” Moody’s said.
The financially struggling junk-rated Cardinal Local School District passed its first tax increase since 1992 after 11 failed attempts. The new 5.5 mill property tax, which does not sunset, will generate nearly $1.7 million in new annual revenue for a “district that nearly depleted its liquidity in fiscal 2016,” Moody’s said.
Other districts that won approval for revenue requests were Aa2-rated Aurora City School District, A3-rated Bellaire Local School District, Aa2-rated Brecksville-Broadview Heights City School District, Aa1-rated Chagrin Falls Exempted Village School District, Baa1-rated Madison Local School District, Aa2-rated Oak Hills Local School District, Baa1-rated Ravenna City School District, A1-rated Riverside Local School District, Aa2-rated Rocky River City School District, Aaa-rated Shaker Heights City School District, Aa2-rated Twinsburg City School District Aa2, Aa2-rated Wooster City School District and Aa2-rated Wyoming City School District.
Other district requests rejected were Aa1-rated Beavercreek City School District, Aa3-rated Liberty-Union-Thurston Local School District, A2-rated Lisbon Exempted Village School District, A2-rated Northridge Local School District, Aa2-rated Pickerington Local School District, A1-rated Tuslaw Local School District and A3-rated Waterloo Local School District A3.
In a credit positive for the Ohio schools, trustees for the State Teachers Retirement System of Ohio recently suspended cost-of-living adjustments for an indefinite period.
“The move will reduce STRS’ unfunded pension liabilities and bring its projected funding period within a statutory maximum,” Moody’s wrote in a recent credit outlook. “The action is credit positive for Ohio school districts, community colleges and public universities, which are collectively responsible for funding STRS, because it avoids a potential increase in their pension contribution requirements.”
The initial July 1, 2016 actuarial valuation put STRS’ unfunded liabilities at $31 billion and its funding period was projected at roughly 27 years. In March, the board updated plan mortality assumptions and lowered the assumed rate of investment return. That resulted in a revision of unfunded liabilities to $37 billion, or 20% higher than the initial actuarial valuation.
According to STRS, the higher reported liabilities pushed its projected funding period to 58 years, well beyond a 30-year maximum requirement prompting the board to indefinitely suspend COLAs.
The decision reduces the plan’s funding period to approximately 20 years and leaves STRS with a reported unfunded liability of approximately $25 billion.
“Its action to suspend COLAs highlights the flexible legal framework surrounding public pension benefits in Ohio,” Moody’s said.
The unfunded liabilities for STRS will remain a broad credit challenge for Ohio school districts, community college districts and public universities and the plan’s new 7.45% assumed rate of investment return remains higher than the 7.0% rate recommended by its actuarial consultants.