Update: Fitch Rates Metro Water Reclamation Dist of Greater Chicago, IL's GOs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--(This release updates the version sent out on July 11, 2011. This version contains updated par amounts.)

Fitch Ratings assigns an 'AAA' rating to the following Metropolitan Water Reclamation District of Greater Chicago, Illinois (the district) bonds:

--$30,000,000 taxable general obligation (GO) capital improvement bonds, limited tax series 2011A;

--$370,000,000 GO capital improvement bonds, limited tax series 2011B;

--$100,000,000 GO capital improvement bonds, unlimited tax series 2011C.

The bonds are scheduled for negotiated sale the week of July 18, 2011.

Proceeds will be used for various capital improvements.

In addition, Fitch affirms the following ratings:

--Unlimited tax GO bonds at 'AAA';

--Limited tax GO bonds at 'AAA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The district serves a large and diverse economic base anchored by the city of Chicago.

--The district's financial cushion remains sound despite generating annual operating deficits for the past four years.

--Aggregated debt ratios are currently easily managed although principal amortization is slow, and future capital needs are substantial.

--The district benefits from seasoned management with a history of prudent financial stewardship.

--The regional economy has faltered during the current national recession, reflected in above-average unemployment rates and housing foreclosures.

--The unfunded pension liability is notable.

--The limited and unlimited tax bonds are rated on parity as currently there are no practical differences on the district's legal ability to collect sufficient taxes to pay debt service.

KEY RATING DRIVERS

--The district's ability to restore financial equilibrium in the near term, and preserve acceptable reserve levels reflective of the rating category;

--The district's ability to address ongoing capital needs while maintaining sound financial margins;

-- The district's long-term ability and willingness to adequately address its severely underfunded pension obligations.

SECURITY:

The limited tax GO bonds are secured by the district's full faith and credit and its ad valorem tax, without limitation as to rate but limited as to amount pursuant to the debt service extension base. The district has covenanted that maximum annual debt service (MADS) on all limited bonds will not exceed the debt service extension base. The base totaled $147.6 million in 2011 and pro forma MADS subject to the limitation totals $132.2 million in 2038.

The unlimited tax GO bonds are secured by the district's full faith and credit and its ad valorem tax, without limitation as to rate or amount.

CREDIT SUMMARY:

The district, encompassing 91% of the land area and 98% of the equalized assessed valuation (EAV) of Cook County (rated 'AA' with a Stable Outlook by Fitch), provides wastewater treatment services to roughly 5.3 million people located in the city of Chicago and 125 suburban municipalities. Although the district has no direct control over wastewater collection and transmission systems maintained by local governments within the county, the district does control sewer construction and expansion through the permitting process. Wastewater is transported to the district's seven treatment plants through a network of interceptor sewers and force mains that connect to local municipal sewer systems. The district's remaining treatment capacity is adequate at 40% with average daily treatment at 1.2 billion gallons per day (BGD) compared to 2.0 BGD treatment capacity. In addition, the district operates a system of underground tunnels designed to store combined sanitary overflows during wet weather periods to prevent untreated discharge.

The district's tax base is still extensive at $616.2 billion or $117,684 per capita despite recent full market value declines. Historically, the district's EAV has shown steady growth, and surprisingly has yet to experience a reduction amidst the ongoing national recession. County wealth indicators are generally on par with the statewide averages. The county, which represents about 40% of the statewide economy, is feeling the effects of the current economic downturn, evidenced by the above-average county unemployment and housing foreclosure rates. For April 2011, Cook County's unemployment rate stood at 9%, which was above the rates of both the state (8.6%) and nation (8.7%).

The district's financial cushion remains sound despite generating single-digit operating deficits for each of the past four years. The district ended 2010 with a 1.8% operating deficit ($5.9 million) and a 62% ($205 million) total general corporate fund (GCF) balance. The district had a negative 53% ($176 million) unassigned GCF balance; however, the negative balance is not representative of financial flexibility, since the district, by policy, is required to classify a significant portion of the total balance as restricted for working cash. The working cash balance is available to support ongoing operations. Therefore, Fitch calculates the district had a still strong 31% ($102 million) unreserved GCF balance when combining the restricted working cash and the negative unreserved balances as a percentage of GCF expenditures. Property taxes accounted for 67% of total GCF revenues in 2010, followed by user charges at 15%. The district's 2011 budget is balanced without use of fund balance or nonrecurring revenues, and given six-month actual results, management is confident the district will achieve such results.

Direct debt levels are low at $521 per capita and 0.4% of market value. Aggregate debt levels are moderate at $3,856 per capita and 3.3% of market value. Principal amortization is slow with 30% repaid within ten years. MADS is elevated at 38% as a percentage of combined general corporate and debt service fund, however, this is acceptable given the district's limited scope. The district's five-year capital improvement plan totals a substantial roughly $2.6 billion, of which $1.6 billion is expected to be bond financed. Prospectively, the implementation of the capital plan and actual scale of the overall debt burden could be more of a credit factor.

Long-term liabilities related to employment benefits are considerable. The district provides pension benefits to its employees through a single employer defined benefit plan. As of December 2010, the unfunded actuarial accrued liability (UAAL) totaled $885 million (57% funded ratio). Using Fitch's more conservative 7% investment return assumption, the plan would be 52% funded. Compounding the issue, the district has not paid its full annual pension cost for the last several years as the district's property tax levy for pension liabilities is capped by state statute and the district has opted not to use other resources to address the shortfall. The district currently is pursuing state legislative changes to ameliorate the funding ratio shortfall. The district's long-term ability to address its severely underfunded pension liability is key to rating stability.

Post employment benefits are also provided to retirees, whereby the district pays 75% of the eligible retiree's annual healthcare premium. As of December 2009, the OPEB UAAL totaled $479 million. The district did establish an OPEB trust in 2007 and as of December 2010 held $48 million in the account. The district currently is exploring meaningful alternatives to reduce its future OPEB liability.

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

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

Applicable Criteria and Related Research:

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

--'U.S. State 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. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546

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