Fitch Affirms Round Lake, IL's Limited Tax Debt Ctfs Series 2003D at 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--In the course of routine surveillance, Fitch Ratings has affirmed its 'A+' rating on Round Lake, IL's (the village) $3.38 million outstanding limited tax debt certificates series 2003D.

The Rating Outlook is Stable.

RATING RATIONALE:

--Round Lake's financial profile is sound despite revenue declines and expenditure pressures given conservative fiscal management and financial planning leading to healthy reserve levels which provide good financial flexibility;

--The village benefits from its favorable location within Lake County and good access to the greater Chicago employment base;

--Very strong population and tax base growth over the past decade has slowed and coupled with local and regional economic sluggishness has resulted in equalized assessed value declines over the past two years;

--While overall debt is high given sizable school and park district borrowings, village direct debt is moderate with future needs limited to rate-supported water and sewer capital projects;

--The debt certificates are payable from any legally available funds and annually appropriated.

KEY RATING DRIVER:

--Management's ability to maintain balanced operations and sound financial flexibility despite slowed tax base growth and continuing economic pressures.

SECURITY:

The debt certificates evidence indebtedness of the village incurred under an installment purchase agreement, are valid and binding obligations of the village payable from any legally available funds, and annually appropriated.

CREDIT SUMMARY:

Located in Lake County approximately 45 miles northwest of Chicago, with good road and rail access to the greater regional employment base and relatively affordable housing, the village experienced rapid growth over the past decade which increased population from 5,842 in 2000 to approximately 18,000 currently. New construction, primarily residential, drove village equalized assessed valuations (EAV) to a peak in 2008 of $421.6 million from $75.2 million in 2000. Recent local and regional economic sluggishness is reflected by county unemployment rates which have tracked closely with state and national levels and village EAV declines. Over the past two years the village has experienced significant home value declines, increased foreclosures and stagnant new construction activity resulting in a total EAV decline of 14% to $363.4 million for tax year 2010. Village officials expect EAV declines to continue at smaller levels for the next few years. Village tax collections remain strong at over 99% and there has been no loss of major village taxpayers or major EAV appeals. The top 10 taxpayers are a diverse mix of commercial and residential properties and comprise a low 7% of total EAV.

Despite revenue declines primarily from decreases in sales and use taxes, the village continues to maintain sound general fund reserve levels due to expenditure reductions, spending controls and conservative budgeting. General fund revenues are led by property taxes (over 50% of the total) which remained stable despite EAV declines. Property taxes are conservatively projected to increase very modestly based on the lesser of 5% or annual CPI adjustments until building permit activity rebounds. Other revenues include state-shared revenue sources including income and sales taxes. Additional revenue flexibility is limited given the village's non-home rule status which limits growth of the property tax levy and allowable debt issuances without voter approval. Leading expenditures are payroll related for administrative and public safety. While no layoffs have been implemented, expenses have been reduced through attrition, open positions, a wage freeze for non-union employees and 0% cost of living union contract for fiscal 2011.

General fund operating performance for fiscal year 2010 resulted in a $312,000 deficit, smaller than the budgeted deficit of $800,000 due to conservative budgeting and tight spending controls. Estimates for just ended fiscal 2011 indicate a general fund operating surplus of $340,000 which will increase the fiscal 2010 cash-basis fund balance to $4.2 million or a high 63% of expenditures. General fund revenues for fiscal 2011 were slightly over budgeted projections driven by improved state remittance of income tax, higher retail sales and related sales taxes, and improving building permit activity. Expenditures were under projections by 5.7% reflective of the positive effect of implemented expenditure controls offset partly by higher than expected snow removal costs. Management projections indicate continuing revenue challenges and expenditure pressures which could result in operating deficits and reserve level declines; however, Fitch expects general fund cash balances to remain sound and above management's target of 30% of expenditures given their historical track record of achieving operating balance. The village's water and sewer fund experienced several consecutive small operating deficits, driven in part by consumption declines but should stabilize following the November 2010 implementation of a minimum 16% rate increase over the next three years. The rate increase should result in increased reserves and funding for additional water and sewer capital improvement projects.

The village's direct debt burden is expected to remain low as near-term capital needs are limited to rate-supported water and sewer projects. Debt amortization is average with 50% retired in 10 years. Due to sizable recent debt issuances by school districts as a result of the population growth over the past decade and related facility needs, overall debt is high at $3,306 per capita and 5.5% of market value. The village prudently contributes 100% of its annually required contribution to three third-party administered pension plans but two of the plans are severely under-funded. Using Fitch's adjusted 7% rate of return, the village's municipal and police retirement plans are funded at a low 55% and 51%, respectively, with $2.5 million and $6.6 million liabilities totaling a manageable 0.75% of market value. The village's sheriff plan has no pension liability. Other post employment benefit costs are minimal. Carrying costs for annual debt service and pension benefits is somewhat high at 22% of estimated fiscal 2011 spending, inclusive.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and IHS Global Insight.

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', dated Aug. 16, 2010.

'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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