NEW YORK--()--Fitch Ratings takes the following rating action on the City of Cumberland, Maryland:
--$20.3 million general obligation (GO) bonds affirmed at 'A'.
The Rating Outlook remains Negative.
The bonds are secured by the city's full faith, credit and unlimited taxing power.
KEY RATING DRIVERS
WEAK FINANCIAL POSITION: The city's general fund fiscal condition remains weak. After three consecutive years of net operating deficits, the city realized a modest operating surplus in fiscal 2011 helping to reduce, but not eliminate the negative unrestricted ending fund balances. Projections for the coming year show further elimination of the negative fund balance through typical enterprise fund transfers.
BELOW AVERAGE ECONOMY: The economy is limited and wealth levels are below-average. Population has been declining and unemployment is above state levels.
MODERATE DEBT LEVELS: City debt levels are moderate, with 45% of debt amortized within ten years. Future capital needs are focused on utility projects for which the city expects continued substantial financing support from the state and a resultant limited increase in tax-supported debt.
WHAT COULD TRIGGER A RATING ACTION
LACK OF FINANCIAL IMPROVEMENT: The inability of the city to produce another audited year of clear improvement in operating performance and a subsequent budget consistent with its forecast for expanding financial flexibility would cause a downgrade.
Cumberland is the county seat of Allegany County located in western Maryland, approximately 130 miles between both Pittsburgh, Pennsylvania and Baltimore, MD. The 2010 census population was 20,859.
FINANCIAL DETERIORATION IN RECENT YEARS
City finances have deteriorated in recent years due to property tax rate cuts earlier in the last decade, economic slowing, increased property tax delinquencies, cuts in state funding and a lack of conservative budgeting. The city's general fund balance has typically been maintained at a low level, with unrestricted assets from the enterprise systems transferred to the general fund, contributing to the city's overall operating profile.
Audited fiscal 2011 results show another negative unreserved ending balance but the city's deficit position improved to a negative $1.6 million or (9.1%) of general fund spending from negative $1.9 million at fiscal end 2010. This is the fourth consecutive year of negative unreserved fund balance in the general fund.
Fiscal 2011 ended with a $66,000 net operating surplus. Positive operations reflecting an increase in tax revenues received due in part to the increase in assessable property values, a tax amnesty program, and a real property tax sale. The general fund balance includes a $1.6 million non-spendable balance for prepaid workers' compensation claims and $536,644 restricted balance for a total balance of $621,000 or 3.5% of spending.
The city continues to rely on profit transfers from its regional water and sewer system (the utility system) to balance general fund operations. For fiscal 2011, the city transferred 100% of the utility system's net profits ($991,000 or about 6% total general fund revenues) to the general fund. Payment in lieu of taxes from the systems totaled $373,400.
Combined water/sewer fund unrestricted net assets increased in fiscal year 2011. The increase reflected growth in water fund net assets (from $1.1 million in fiscal year 2010 to $1.7 million in fiscal year 2011) and a decline in sewer fund net assets (from $128 thousand to a deficit of $445 thousand).
Sewer fund finances were affected by greater than expected operations costs associated with a new Enhanced Nutrient Removal (ENR) Waste Water Treatment Plant. The city increased rates by 13% for fiscal year 2012 to address increased needs. The continued sound financial performance of the utility system is an important credit consideration.
MEETING PROJECTIONS FUNDAMENTAL TO RATING STABILIZATION
The city's financial projections show continued improvement in operating performance through revenue growth and cost containment. The Negative Outlook reflects the fact that Fitch remains concerned about the city's ability to stay the course to fiscal recovery given somewhat aggressive revenue assumptions and the limited economy.
The city used interfund borrowing to support general fund liquidity needs in fiscal 2011 and replenished those funds with proceeds of a debt restructuring as laid out at the time of Fitch's review last year. The restructuring yielded outstanding GO debt service savings of $5.5 million over the first five years, $3.7 million of which was realized in fiscal year 2012.
The city's forecast also shows a continued reduction in its reliance on the transfer from the water fund to 50% by fiscal 2015, down from 100% in fiscal 2011. The city reports unaudited fiscal 2012 results outperforming projections and yielding a $1.17 million net operating surplus; raising the negative fund balance position to $989,000 unrestricted balance (6% of general fund spending).
The city will continue to benefit from the debt restructuring in fiscal 2013. Offsetting a 2.2% decline in revenues due to assessed value reductions is a 3.3% decline in expenditures. Budgeted results show a $1.34 million net operating surplus, or a positive but narrow $349,000 unrestricted balance or 2.2% of general fund spending. Fiscal 2013 operations continue to be supplemented by a $1.5 million transfer from the water fund or 70% of the system's projected profit.
TIGHT BUT IMPROVING LIQUIDITY
The savings from the restructuring strengthen the city's cash position after repayment of internal borrowing. Liquidity has always been minimal in the general fund, partially attributable to the city's practice of pooling its cash, exacerbated over the last few years by operating deficits. The city has relied on increasing tax anticipation notes (TAN) issuance, up from about $2 million annually to $4 million in fiscal year 2011. The city did not issue TANs in fiscals 2012 or 2013 largely due to the benefit of the restructuring but partially due to improvement in operating performance.
BELOW-AVERAGE ECONOMY AND DEMOGRAPHICS
The city's economy is relatively limited. Some growth in the healthcare industry over recent years has helped offset the historical dependence on a declining manufacturing base. Wealth levels in the city are considerably below average relative to the state and the nation.
The city's population has declined over the last few decades and shrank by about 3% since 2000 to 20,859 residents in 2010. The unemployment rate for Allegany County, a close proxy, was 7.6% in September 2012, remaining below the comparable national average (7.8%) but above that of the state (6.9%).
DEBT SERVICE REMAINS AFFORDABLE
Overall debt levels are moderate at approximately 2.6% of market value for real property in fiscal 2012. Amortization, excluding utility debt, is slightly below average, with over 45% of principal being retired in the next 10 years. Pension and OPEB contributions together total a modest 9% of spending and do not pressure the credit.
The city plans to issue $3.5 million in long-term debt during the current fiscal year to fund the demolition of a hospital facility and for street improvements. The city expects to refund several series of notes simultaneously for debt service savings to offset the additional debt service costs of the new issuance.
The city's utility system is under a consent order with which it needs to comply by fiscal year 2022. The city is working on the project with the state, and the project is expected to funded through a blend of loans and grants from the state and Environmental Protection Age. If the state were not able to provide adequate funding, the city may need to issue additional debt to address the order. Due to the long-term nature of this project and expected external funding, Fitch does not believe the city will experience financial pressure in the near term.
The city participates in the state pension plan and funds the required contribution annually. The state plan has a low funded ratio of 57.7% when using Fitch's 7% internal rate of return and as a result, Fitch would expect participant pension costs to increase over time.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
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
U.S. Local Government Tax-Supported Rating Criteria