For Your Information

CINCINNATI
July 16, 2013

city or

To: From: Subject:

Mayor and Members of City Council Milton Dohoney, Jr., City Manager

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Moodys Bond Rating Released 7/15/2013

As reported to you in an FYI memo dated 4/19/2013, Moodys Investor Services announced a new methodology on rating state and local government pensions as part of it credit ratings process. The City of Cincinnati was recently reviewed under the new standards. Part of the new methodology incorporates an analysis of not only the Cincinnati Retirement System (CRS), but also Ohio Public Employees Retirement System (OPERS) and Ohio Police and Fire Retirement System (OP&F). Moodys is now calculating the potential liabilities of all three systems, instead of just the CRS, which the City wholly manages. Additionally, Moodys continues to view the Citys use of one time sources in budget-balancing as a challenge. As a result of this review, Moodys downgraded Cincinnatis General Obligation bonds from Aal to Aa2 and revised the Outlook to negative. In addition, outstanding economic development, non-tax revenue and Convention Facilities Authority Second Lien revenue debt was downgraded from Aa2 to Aa3, with Outlook revised to negative. Per the Summary Rating Rationale, the downgrade to Aa2 reflects the Citys exposure to two statewide multi-employer cost-sharing pension plans as well as the Citys single employer plan. In other words, Moodys new methodology now accounts for the Citys pro rata share of liabilities for OPERS and OP&F, in addition to the CRS liability for which we have always been rated. They also cite the citys pressured but still satisfactory financial position, including the recent stabilization of income tax revenues. Moodys cites the inability to enact a long-term pension contribution strategy to improve funded status of CRS and increased exposure to unfunded pension liabilities as a factor that could change the rating downward. It is important to note the Ohio Revised Code provides the percentage each employer pays into OPERS and OP&F as its contribution. The City has paid 100% of this contribution each year as required. The City has no ability to impact the unfunded liability of OPERS or OP&F. The CRS pension board is working through scenarios to address the CRS unfunded liability. The next board meeting is Aug 1~, 2013, and any board recommendations that may come out of that meeting will be presented to City Council.

In their report, Moodys cites, The negative outlook reflects the expectation that the city will continue to face challenges in attaining structurally balanced operations, stemming from its unfunded pension liabilities and reliance on a number of one-time budgetary solutions in recent years. In reviewing this information it is important to keep in mind that even though the City did experience a downgrade in its bond rating, which is taken very seriously and will require much fiscal discipline to raise or keep stable, the City is still a Aa2 rated credit, which means the City is a top tier credit with the third highest rating available. Only 16% of the Cities and Districts that have its General Obligation Debt rated by Moodys have a Aa2 rating or higher. Moodys further states they believe the citys financial operations will remain fundamentally sound due to managements quick response to recent shortfalls and its demonstrated commitment to implementing budgetary adjustments to preserve fund balance within its minimum policy, as indicated by unaudited results for fiscal 2012.

yt-~c: Reginald Zeno, Finance Director