M-10 - Ratings Summary Report

Continued revenue growth, supported by new sales tax, will be important to cover rising costs and sustain very strong reserves Key to maintaining credit stability will be the city's ability to manage rising costs as services and capital costs continue to grow along with its population. Police and fire costs will increase significantly, with the police contract, for example, escalating from $290,000 in fiscal 2025 to $1 million in fiscal 2029, pursuant to the new five-year contract beginning July 1, 2024. Given ongoing residential development and property value growth, property tax revenue growth will likely cover a substantial portion of rising expenditures. Collections began Jan. 1, 2024, for the city's new local option sales tax. The tax does not sunset and management believes its estimate of $600,000 a year in new tax revenue is highly conservative. The city plans to use the tax to limit the rate of property tax levy growth required to support rising costs related to a new recreation center. The sales tax revenue will also support other infrastructure needs. The city reports its finances on a cash-basis of accounting, which we consider a credit limitation because cash-basis accounting provides a more opaque view of an entity's true financial condition than accrual-basis accounting. Cash-basis accounting contributes to some volatility in financial performance. For fiscal 2023, total governmental fund performance appears sharply negative per audited results, however we note this was driven by higher capital spending that will effectively be reimbursed by bond proceeds in fiscals 2024 or 2025. The city did not receive regular financial audits prior to fiscal 2022. The city's finances were audited in fiscals 2022 and 2023, and we understand it will publish audited financials annually. At more than 200% of expenditures during the past three years, the city's available fund balance is very strong. The city's capital plan includes using up to $3 million for its North Park Road project. Beyond that, the city does not have any current plans to draw down reserves. Management expects to add about $500,000 to the available fund balance in fiscal 2024. With $3.5 million in total liquidity at fiscal year-end 2023, excluding funds reported as restricted on the statement of activities, the city's total liquidity is very strong. In fiscals 2021 and 2022, our calculation of total governmental fund expenditures are net of bond-funded capital outlays. For fiscal 2023, capital outlays were not funded with bond issuance in that year, bringing the capital project fund balance negative. We understand the city will replenish the capital projects fund with the series 2024A issuance. As we have not adjusted fiscal 2023 governmental fund expenditures for bond-funded capital outlays, the result is much weaker for that year. Standard financial management assessment The city's financial management policies and practices are standard, per our Financial Management Assessment. The city employs line-item budgeting and references a minimum of three years of historic results when formulating the budget. It typically amends the budget once per year. Management makes monthly treasurer's report to city council includes total cash balances and monthly revenues and expenditures, though it does not compare performance to budgeted levels. The city does not maintain a financial forecast but does update a seven-year capital improvement plan at least twice per year, outlining planned expenditures and funding sources. Tiffin has an investment policy outlining its adherence to state law. It does not have a formal debt policy or formal reserve policy, but management is mindful of the state's recommendation that cities maintain a minimum of 25% of expenditures in available reserves.