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U.S. PUBLIC FINANCE

CREDIT OPINION25 September 2017

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Cuyahoga County, OHNew Issue - Moody's Assigns Aa2 to Cuyahoga County, OH'sSales Tax Revenue Bonds

Summary Rating RationaleMoody's Investors Service has assigned a Aa2 rating to Cuyahoga County's (OH) upcoming$142 million sales tax revenue bond offerings consisting of Sales Tax Revenue Bonds, Series2017A, 2017B, and 2017C (Quicken Loans Arena Project). The outlook on the ratings is stable.Following the sale, the county will have $310 million of sales tax revenue bonds outstanding.

The Aa2 special tax sales tax rating largely incorporates Cuyahoga County's generalobligation (GO) rating. While the county has favorably covenanted to direct the State ofOhio (Aa1 stable) state Tax Commissioner to directly transfer receipts first to the bondtrustee, this does not achieve complete legal divergence. The rating also considers the largeeconomic base from which the tax is generated, a strong 3.0x additional bonds test, healthycoverage of maximum annual debt service, and positive sales tax trend.

Credit Strengths

» While falling short of complete legal segregation, the direct transfer of pledged salestaxes from the state to the trustee is a strength as is the additional bonds test of 3.0xmaximum annual debt service

» Broad sales tax base, strong debt service coverage and positive revenue trend

Credit Challenges

» Lack of required debt service reserve fund partially mitigated by very strong coverageprojection and monthly set asides of pledged taxes

» Ten-year history of sales tax collections includes a sizeable 10.4% decline in 2009,indicating the potential for significant volatility

Rating OutlookThe stable outlook is consistent with the outlook on the county's GO rating. It alsoincorporates an expectation of very healthy debt service coverage given the broad base ofthe pledged revenue source and generally positive trend in sales tax collections.

Factors that Could Lead to an Upgrade

» Upgrade of the county's general obligation rating or achievement of full legal segregationof pledged revenue from the county's general operations

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBM_1091747

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Factors that Could Lead to a Downgrade

» Declines in annual sales taxes and debt service coverage

» Weakened legal covenants

» Downgrade of the county's general obligation rating

Key Indicators

Exhibit 1

Cuyahoga County

Credit Background

Pledged Revenues Sales Tax

Legal Structure

Additional Bonds Test 3.00

Open or Closed Lien Open Lien

Debt Service Reserve Fund Requirement No DSRF

MADS Coverage

2016 MADS Coverage (x) 8.2x

Trend Analysis

2012 2013 2014 2015 2016

Debt Outstanding ($000) - - 137,690 147,005 146,730

Revenues ($000) 226,787 237,307 246,767 257,655 272,209

Annual Debt Service Coverage (x) 0.0x 0.0x 0.0x 175.3x 148.8x

MADS includes payments on the 2017 bonds. Coverage excludes the county's 0.25% sales tax set to expire in 2027, though it is pledged until it expires.Source: Cuyahoga County's audited financial statements, Preliminary Official Statement

Recent DevelopmentsSince publishing our credit opinion in May 2017, the county released its fiscal 2016 audited financial statements. The financial resultsare detailed in the financial operations and reserves section of the report. The county delayed the current issuance to October 2017from June 2017.

Detailed Rating ConsiderationsTax Base and Nature of Pledge: Broad sales tax baseThe county's sales tax revenue bonds are special obligations of the county, secured by revenue collected from its 1.25% sales tax. Thepledge is broad with limited major exclusions other than prescription drugs, food and Medicaid-oriented managed care organizations(MCOs). While the county's current sales tax is 1.25% and all associated revenue is pledged to repayment of the bonds, 0.25% of therate expires in 2027 while the county's sales tax bonds do not mature until 2038. The county adopted the additional 0.25% in 2007 tosupport construction and operations of the Global Center for Health Innovation (GCHI) in downtown Cleveland (city rated A1 stable).The bonds issued to finance construction of the GCHI are secured by nontax revenue, but the county intends to continue to repaythose Series 2010F-G bonds, as well as its Series 2014 certificates of participation (hotel project), with the temporary 0.25% sales tax,though sales tax proceeds are not legally required to be used for those payments as they are for sales tax bonds. In fiscal 2016, totalsales tax revenue was $272 million, of which $218 million was generated from the permanent 1% rate.

The county covers a large area of 458.3 square miles. The population dropped 8.2% between 2000 and 2010. American communitysurvey estimates indicate the population continued to decline subsequently, though at a less rapid pace of under half a percent eachyear. The county is estimated to have slipped to the second largest in the state with an estimated population of 1.26 million as of 2015.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 25 September 2017 Cuyahoga County, OH : New Issue - Moody's Assigns Aa2 to Cuyahoga County, OH's Sales Tax Revenue Bonds


Median family income is estimated at 92% of the US median, with a number of wealthy suburbs offsetting the low socioeconomicprofile of Cleveland. The City of Cleveland's urban core is undergoing a revitalization with significant residential and commercialdevelopment.

Debt Service Coverage and Revenue Metrics: Pledged revenue provides very strong coverageDespite a decline in receipts projected for fiscal 2017, we expect the county's sales taxes will continue to provide very ample coveragedebt service on outstanding and Series 2017 revenue bonds given positive trends in collections. Although secured by sales taxes, half ofthe debt service on the current offering is expected to be paid by the NBA's Cleveland Cavaliers through increased rental payments. Thecounty intends to cover the remaining half of debt service with other county resources as well as payments from the City of Cleveland.The county resources include its occupancy tax and arena events tax. The Cleveland Cavaliers have agreed to cover the shortfall on theSeries 2017 B and C bonds if county and city resources fall short of projections.

Sales taxes grew at a robust pace of between 4% and 6% annually since 2010. The county projects receipts will decline by 2% in fiscal2017 and projects that growth will be slower than typical at 2% in fiscal 2018 due to a change in state law that prevents the countyfrom continuing to collect sales taxes from Medicaid-oriented managed care organizations (MCOs). Sales taxes generally grew over thepast twenty years despite a few declines during economic downturns. In 2009, sales taxes fell a substantial 10.4%.

Exhibit 2

3.2%

4.8%5.3%

4.7%

6.3%

-1.6%

0.3%

-0.8%

5.3%

2.2%

-0.2%

1.8%

1.1%

-10.4%

5.6%6.1%

4.7% 4.6%

4.0%4.4%

5.7%

-2.2%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

$0

$50

$100

$150

$200

$250

$300

Mill

ions

Annual rate of growth Continuing 1% Collections (1.25% post-2007)

Source: Cuyahoga County audited financial statements, continuing disclosures and official statements

Sales taxes covered debt service nearly 150x in fiscal 2016 because debt service had not yet fully ramped up on the county's initial salestax bond offerings. Based on 2016 collections, coverage would fall to 38x in 2017, 16x in 2018 and then steadily thereafter to 10x by2027. The 1% continuing sales tax alone provides ample post-sale maximum annual debt service (MADs) coverage of 8.2x. Includingthe full 1.25% sales tax, post-sale MADs coverage is 10.2x. Coverage may fall moderately as the county intends to issue $20 millionin sales tax revenue bonds within the next year to finance facility projects. The county anticipates that issuance will be paid for withoperational improvements and asset sales.

LIQUIDITYThe county's liquidity is healthy with a net operating fund cash position of $373 million, or 34.1% of revenue at the close of fiscal 2016.The general fund had $223 million, or a solid 29.1% of revenues.



Debt and Legal Covenants: Flow of funds provides for direct payment to trustee though falls short of complete legaldivergenceThe sales tax bonds have a strong flow of funds with favorable bondholder protections, although we do not believe it providescomplete legal segregation from the county's general financial operations. Per the sales tax bond trust indenture, the county covenantsto direct the state Tax Commissioner, or another appropriate state official, to transfer the county's locally generated sales taxes directlyto the trustee for deposit in a designated bond retirement fund. The trustee, Huntington National Bank (Aa3), is required to depositone-fourth of the next interest payment and one-tenth of the next principal payment to the bond retirement fund. Excess monthlysales taxes are then transferred to the county for general operating purposes.

We cap special tax ratings at an issuer's general obligation rating in most cases. To achieve a higher rating, the revenue stream mustbe sufficiently legally separated from the local government’s credit, which is most often achieved through state level legislation thatcreates a special purpose entity to which the local unit has irrevocably assigned the rights to pledged revenue. While Cuyahoga Countyhas pledged to direct the state Tax Commissioner to redirect funds, the county has not given up its right and interest in its sales tax.Thus, we cap the sales tax bonds at the county’s rating.

The additional bonds test (ABT) is strong. It requires that, on average, the most recent 24 months of collections from the county's 1%permanent sales tax provide 3.0x coverage of maximum annual debt service on existing and proposed bonds. There is no debt servicereserve requirement.

DEBT STRUCTUREAll of the county's debt is fixed rate. Sales tax revenue debt principal is amortized over 20 years.

DEBT-RELATED DERIVATIVESThe county is not a party to any derivative agreements.

PENSIONS AND OPEBCounty employees are predominantly members of the Ohio Public Employees Retirement System (OPERS), though a very small shareparticipates in the State Teachers Retirement System. In 2012, the state legislature adopted benefit reforms for all Ohio cost-sharingplans that highlighted the state's flexible legal framework surrounding public pension benefits. Ohio statute establishes a 30-yeartarget for amortizing unfunded liabilities of all statewide cost-sharing plans. If plan actuaries determine current contribution ratesand actuarial assumptions result in an amortization period exceeding 30 years, the pension fund must submit a plan for adjustingcontributions or benefits to meet the 30-year requirement. The 2012 reforms amended annual cost-of-living adjustments (COLAs) forretirees, resulting in a considerable decline in reported unfunded liabilities in 2013.

Notwithstanding the positive impact of the 2012 reforms, unfunded liabilities of OPERS remain high. The Moody's ANPL of the plangrew 14% from 2015 to 2016. Further, fiscal 2016 statewide employer contributions to the plan fell below the amount necessary toforestall growth in reported net pension liabilities assuming other plan assumptions hold, that is, tread water.1 Ohio statutes establishlocal government retirement plan contributions as a share of annual payroll and in fiscal 2016 the statewide contribution to OPERSwas 89% of the amount needed to tread water, indicating unfunded pension liabilities, on both a reported and Moody's-adjusted basis,could grow. Still, we do not perceive a material near-term increase in the credit challenge posed to Cuyahoga County from unfundedpensions.

Management and Governance: Moderate institutional framework scoreOhio counties have an Institutional Framework score of A, which is moderate compared to the nation. Institutional Framework scoresmeasure a sector's legal ability to increase revenues and decrease expenditures. The sector's major revenue source, sales tax, is subjectto a cap of 1.5% which can be overriden with voter approval only. However, many counties maintain headroom under the local cap.Revenues and expenditures tend to be predictable. Ohio has public sector unions, which can limit the ability to cut expenditures.

The Cuyahoga County council has the authority to extend the 0.25% portion of the sales tax rate that is set to expire in 2027. Councilcould also impose another 0.25% without voter approval bringing the general sales tax rate to a total 1.5%, though any increase wouldbe subject to repeal by voter referendum.



Legal SecurityThe current issuances and the county's outstanding sales tax revenue bonds are secured by a senior lien on revenue collected pursuantto the county's current 1.25% sales tax. Although secured by the city's sales taxes, debt service on the 2017 bonds is expected topaid with other county resources (1.5% hotel tax and arena event tax receipts), city resources (arena event admissions tax) and rentpayments from the Cleveland Cavaliers.

Use of ProceedsThe Series 2017A, B and C bonds will finance the costs of improvements to Quicken Loan Arena.

Obligor ProfileCuyahoga County is one the two largest counties in Ohio with a population of 1.3 million as of the 2010 Census. Approximately 30%of the county's population resides within the City of Cleveland, the county seat. County operations include economic development,health and human services, public safety and general governmental functions.

MethodologyThe principal methodology used in this rating was US Public Finance Special Tax Methodology published in July 2017. Please see theRating Methodologies page on www.moodys.com for a copy of this methodology.

Ratings

Exhibit 3

Cuyahoga (County of) OHIssue RatingSales Tax Revenue Bonds, Series 2017B (QuickenLoans Arena Project) (Federally Taxable)

Aa2

Rating Type Underlying LTSale Amount $35,995,000Expected Sale Date 10/04/2017Rating Description Special Tax: Sales

Sales Tax Revenue Bonds, Series 2017C (QuickenLoans Arena Project) (Federally Taxable)

Aa2


Sales Tax Revenue Bonds, Series 2017A (QuickenLoans Arena Project) (Tax Exempt)

Aa2


Source: Moody's Investors Service

Endnotes1 Our “tread water” indicator measures the annual government contribution required to prevent reported net pension liabilities from growing, given the

entity's actuarial assumptions. An annual government contribution that treads water equals the sum of employer service cost and interest on the reportednet pension liability at the start of the fiscal year. A pension plan that receives an employer contribution equal to the tread water indicator will end theyear with an unchanged net pension liability relative to the beginning of the year if all plan assumptions hold. Net liabilities may decrease or increasein a given year due to factors other than the contribution amount, such as investment performance that exceeds or falls short of a plan's assumed rateof return. Still, higher contributions will always reduce unfunded liabilities faster, or will allow unfunded liabilities to grow more slowly than lowercontributions.



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