New Issue: Moody's assigns A3 to City of Lorain, OH's $5.9M GOLT Bonds,Series 2014

Global Credit Research - 14 May 2014

A3 affirmed on $55.3 million post-sale GOLT debt

LORAIN (CITY OF) OHCities (including Towns, Villages and Townships)OH

Moody's RatingISSUE RATINGGeneral Obligation Street Improvement Bonds, Series 2014 A3 Sale Amount $5,880,000 Expected Sale Date 05/21/14 Rating Description General Obligation Limited Tax

Moody's Outlook NOO

Opinion

NEW YORK, May 14, 2014 --Moody's Investors Service has assigned an A3 rating to the City of Lorain's (OH)$5.9 million General Obligation Limited Tax (GOLT) Street Improvement Bonds, Series 2014. Debt service on thebonds is secured by the city's general obligation limited tax pledge, subject to the State of Ohio's (Aa1 stable) 10mill limitation. Concurrently, we affirmed the A3 rating on the city's outstanding GOLT debt. Proceeds from thebonds will finance street repair and improvements throughout the city. Post-sale, the city will have $55.3 million inlong-term GOLT debt outstanding.

SUMMARY RATINGS RATIONALE

The A3 rating reflects the city's moderately sized tax base with below average income levels which is still sufferingfrom the effects of the economic downturn; income tax payer and employment concentration; sustainedoperational imbalance with maintenance of satisfactory reserves following utilization of one-time revenue sourcesto close recent and projected budget gaps; and above average debt burden and pension exposure.

STRENGTHS

- Satisfactory operating reserves in the city's General and Police funds

- Passage of income tax levy renewal

CHALLENGES

- Income tax payer and employer concentration

- Below average resident income levels

- Consistent and expected use of one-time revenues to close budget gaps

- Reliance on economically sensitive income tax revenues

DETAILED CREDIT DISCUSSION

FINANCES PRESSURED AS OUTYEAR BUDGET GAPS REMAIN; RECENTLY REMOVED FROM FISCAL

WATCH

The city's financial operations are expected to remain pressured over the next two to three years as managementcontinues to project structural budget gaps. The city was removed from Fiscal Watch status by the Auditor of theState of Ohio (Aa1 stable) in October 2013 because they were able to forecast positive yearend General Fundcash positions for fiscals 2013 through 2015. Despite being removed from Fiscal Watch, the city is still facingstructural imbalances that could materially reduce already limited reserve levels. In fiscal 2012, the city facedrevenue losses in state aid of approximately $1 million, as well as the loss of revenues from an income tax creditreduction override. To balance operations, the city appropriated its operating surplus from fiscal 2011 to cover therevenue losses in fiscal 2012. The city closed fiscal 2012 with $4 million in available GAAP basis General Fundbalances, which is equivalent to a satisfactory 14% of revenues, and $1.5 million in reserves in the Police LevyFund. On a budgetary cash basis, the city had $1.4 million in reserves in the General Fund.

Preliminary estimates for fiscal 2013 point to a reduction in overall fund balance to $1.0 million on a budgetary cashbasis. This is despite the city's passage of a permanent 0.5% income tax rate increase approved by voters inNovember 2012, with 0.25% dedicated for streets and 0.25% for general purposes. The city maintains an incometax rate of 2.5%, of which 2.25% is continuous and 0.25% was recently renewed for an additional five years. Ofthis rate, 1.75% is continuous and dedicated for general purposes, 0.25% is temporary for general purposes,0.25% is continuous for street improvements and 0.25% is continuous for public safety. The city would not havebeen able to achieve near balanced operations without this rate increase and the city's receipt of the first of two$1.2 million settlements resulting from a lawsuit. The city received the first of these funds in December of 2013which enabled the city to close a significant portion of the budget gap. The budget gap was driven due to lostproperty and estate tax revenues, declining Local Government Fund (LGF) revenues from the state and an$800,000 negative variance in income tax collections due to the delayed hiring of 450 employees by RepublicSteel.

In fiscal 2014, the city received the second and final payment of $1.2 million and reports that based on year to daterevenue and expenditure trends, that overall General Fund reserves will improve to $1.3 million on a budgetarycash basis. Management notes that without this settlement revenue, fiscal 2014 would have seen anotherstructural budget gap which could have adversely impacted the reserve position. Looking forward to fiscal 2015,city officials expect another budget gap of roughly $1 million. Management is currently in the preliminary stages ofidentifying gap closure measures. While the city has been able to maintain its reserve position in recent years, theuse of one-time revenue enhancements and the persistent structural gaps puts the city's narrow financial reservesat risk. Closure of fiscal year 2014 below expectations would likely impair the city's financial position and putpressure on the credit rating.

CITY'S MANUFACTURING DOMINANT EMPLOYMENT BASE STILL FACING SIGNIFICANT CHALLENGES;HIGH LEVELS OF INCOME TAX PAYER CONCENTRATION

The city's moderately sized $2.3 billion tax base, located in northeastern Ohio, has exhibited steady averageannual declines of 4.1% over the last five years. This includes a 13% reduction in valuations during the city'ssexennial update which reflects declines in residential and commercial valuations from the downturn. The city'sunemployment rate remained high at 11.2% as of January 2014 and labor market weakness continues to reflectthe 2005 closure of a Ford Motor Company (Baa3 stable) manufacturing facility and other job losses at RepublicEngineered Products and Lorain Tubular (parent company U.S. Steel Corporation Ba3 stable), two local steelmanufacturing facilities. The city also exhibits high levels of income tax payer concentration with the top tentaxpayers comprise approximately 25% of annual collections. Lorain Tubular (726 employees) began a $93 millionupgrade of its facility in 2011, adding an additional 90 permanent jobs and 150 temporary construction jobs.Republic Steel completed construction of a new $85 million new electric arc furnace in 2013. While initialexpectations were that Republic would add 449 new jobs and bring the company's workforce back close to its2008 numbers of 1,100, challenges at the plant have delayed hiring. Investment at the two plants is attributed tosteel required for the growing oil and gas presence in Ohio due to the Utica and Marcellus Shale deposits ineastern Ohio, and a rebounding auto industry.

City officials have worked to retain and attract employers by creating urban renewal zones, maintaininginvestments in infrastructure and providing income and property tax abatements. Industrial Realty Group (IRG)acquired the former Ford facility in 2006 and has refurbished portions of it, attracting several distribution andwarehouse companies to the site. The company recently purchased a closed National Gypsum plant, which itintends to market for refurbishment. The city is renewing focus on development of its lakefront by removingtransmission lines. Positively, the city's top two employers, Mercy and Lorain City School District, have beenrelatively stable entities. Mercy, a regional health center with 1,704 employees, embarked on a $20 million capitalimprovement plan in 2010. Median family income is estimated at 65% of the national figure. We expect the city's

local economy to remain challenged given the concentration in the steel industry and manufacturing given thecurrent economic climate.

ABOVE AVERAGE DEBT BURDEN WITH POTENTIAL ADDITIONAL BORROWING PLANS

We anticipate that the city's overall debt burden of 4.8% of full value (2.9% direct) will remain above average givenits below average principal amortization rate of 64% and plans for future borrowing. The city funds approximatelyhalf of its outstanding obligations from non-property tax revenue sources including income tax, specialassessments, tax increment, and utility revenues, which reduces the burden on property taxpayers. In addition tothe current offering, the city will leverage its recently passed street improvement levy to borrow an additional $8million from the state for street improvement purposes. Net of refunding transactions, debt service expenditurescomprised a manageable 15% of operating expenditures in fiscal 2012.

The city has outstanding $8.7 million in GOLT bonds for development of the Harborwalk multi-use development onthe Black River downtown. The city has an agreement with the developer, Spitzer Great Lakes that Spitzer willmake up a shortfall in the difference between debt service payments and urban renewal revenues received. Theurban renewal revenues are collected from the 140 houses that were constructed in the development out of aplanned 478. To date, the developer has paid the short fall in urban renewal revenues in order to cover debtservice requirements. For fiscal 2013, the shortfall was $355,000 and Spitzer has continued to honor itsagreement. Should the developer fail to make the payment, city officials report that the city currently has sufficientreserves in the Bond Retirement Fund that could cover the payment in fiscal 2014. The bonds have annual debtservice of approximately $680,000. One series matures in 2028 and the other in 2032. All of the city's outstandingdebt is fixed rate, and the city is not a party to any interest rate swap agreements.

EXPOSURE TO AN UNDERFUNDED COST-SHARING PENSION PLAN POSES SOME LONG-TERM RISK

The city's fiscal 2012 adjusted net pension liability (ANPL) is $130.4 million, equivalent to a high 4.0 timesoperating revenue and 5.8% of full valuation. The ANPL is based upon an allocation of the unfunded liabilities oftwo multi-employer cost-sharing pension plans to which the city contributes, net of enterprise contributions, as wellas our methodology for adjusting reported pension information. City employees are members of the Ohio PublicEmployees Retirement System (OPERS) and Ohio Police and Fire (OP&F) pension plan, and the city's fiscal2012 contribution to the two plans was $4.3 million or 13% of operating revenue. We allocated the reportedunfunded liabilities of the plans to the city's based on its share of total public employer contributions. Because2013 valuations are not yet available for OPERS and OP&F, the current ANPL does not incorporate reforms thatwere enacted by the state in 2012 for all cost-sharing plans to control annual cost-of-living adjustments for retireesand to increase employee plan contributions.

What could change the rating - UP:

- Expansion and diversification of tax base along with continued creation of new employment opportunities

- Significant increase of financial reserves to levels sufficient to offset the city's reliance on economically-sensitiveincome tax receipts

What could change the rating - DOWN:

- Negative variances in fiscal 2014 and inability to close out-year budget gaps

- Deterioration in employment base or development activity

- Continued non-performance of development projects that lead to deterioration of developer agreements andultimately require the city to cover debt service to avoid default

KEY STATISTICS

2014 Full value: $2.3 billion

2014 Estimated full value per capita: $35,153

2008-2012 Median family income (as a % of US): 65%

Fiscal 2012 Available Operating (General + Debt + Police Levy) Fund Balance: 16.7% of revenues

Fiscal 2007 to Fiscal 2012 Change in Available Operating Fund Balance as a % of revenues: 14.9%

Fiscal 2012 Operating Fund Cash Balance: 11.6% of revenues

Fiscal 2007 to Fiscal 2012 Change in Operating Fund Cash Balance as a % of revenues: 8.4%

Fiscal 2007 to Fiscal 2012 Average Operating Revenues / Operating Expenditures: 1.01 times

Institutional Framework: A

Net Direct Debt / Full Value: 2.9%

Net Direct Debt / Operating Revenues: 2.0 times

3-year average of Moody's ANPL / Full Value: 4.4%

3-year average of Moody's ANPL / Operating Revenues: 3.0 times

RATING METHODOLOGY

The principal methodology used in this rating was US Local Government General Obligation Debt published inJanuary 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatorydisclosures in relation to each rating of a subsequently issued bond or note of the same series or category/classof debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordancewith Moody's rating practices. For ratings issued on a support provider, this announcement provides certainregulatory disclosures in relation to the rating action on the support provider and in relation to each particular ratingaction for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings,this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and inrelation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case wherethe transaction structure and terms have not changed prior to the assignment of the definitive rating in a mannerthat would have affected the rating. For further information please see the ratings tab on the issuer/entity page forthe respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related ratingoutlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legalentity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures foreach credit rating.

Analysts

Chandra GhosalLead AnalystPublic Finance GroupMoody's Investors Service

Matthew WieserBackup AnalystPublic Finance GroupMoody's Investors Service

Matthew ButlerAdditional ContactPublic Finance GroupMoody's Investors Service

Contacts

Journalists: (212) 553-0376 Research Clients: (212) 553-1653

Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 USA

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