NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Skokie, IL (the village) bonds:
--$9 million general obligation (GO) bonds, series 2013A.
The bonds are expected to price the week of September 16. Proceeds will be used to reimburse funds used to build a commuter rail station.
Additionally, Fitch affirms the 'AAA' rating on approximately $57 million of outstanding GO bonds of the village.
The Rating Outlook is revised to Negative from Stable.
The bonds are a general obligation of the village backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
FUNDING LEVELS DRIVE OUTLOOK SHIFT: The change in Outlook to Negative from Stable reflects the village's maintenance of fund balance levels below historical levels while simultaneously failing to achieve meaningful improvement in pension funding.
AFFLUENT CHICAGO SUBURB: Proximity to Chicago and an expanding transportation network attracts a professional work force with above-average wealth levels.
MULTIPLE REVENUE SOURCES: Skokie benefits from its home rule charter affording it a diverse revenue stream and superior financial flexibility.
SALES TAX REVENUE STRENGTH: Sales tax revenues recovered well from a recession-led decline. This revenue source is anchored by several prominent shopping malls which attract consumers throughout Chicago's northern suburbs.
PENSION CHALLENGES: Pensions are somewhat underfunded and though the village has met state funding requirements, it has not been making its actuarial required contribution (ARC).
FUND BALANCE BELOW TARGET: Fund balance levels are well below past highs and recent surpluses have only modestly improved the position.
FUND BALANCE AND PENSION FUNDING: Failure to return fund balance closer to past norms and increase pension funding levels will result in downward rating pressure.
Skokie is located in Cook County, 16 miles northwest of downtown Chicago. Its population is 64,784, which is up 2.3% from 2000. A number of residents commute into Chicago and other nearby suburbs. Wealth levels continue to be high with the median household income at 118% of the state level and 126% of the national average.
ECONOMY ANCHORED BY SUCCESSFUL MALL
The village has a diverse economic base led by three large shopping centers, including the Old Orchard Shopping Center, and various commercial and industrial areas. Management reports that the Old Orchard Shopping Center is fully occupied. The village's retail sales per capita are equal to 142% of the state norm. NorthShore University Health System is the village's largest employer (2,410) followed by vehicular and manufacturing parts supplier FederalMogul (1,500).
A new train station (Skokie Swift) recently opened which will enhance commuters' access to Skokie's downtown and the Illinois Science and Technology Park, helping to promote redevelopment and business relocation. The village is also expecting to benefit from the opening of a Super Wal-Mart in late 2014. These developments should help reverse recent declines in assessed value.
DIVERSE REVENUE SOURCES LED BY SALES TAX
The village has substantial financial flexibility from its diverse sources of revenues and as a result has maintained a property tax levy freeze since 1991. Its primary revenue source is sales taxes, comprising 39% of general fund revenues. After a notable decline in fiscal 2009 (year ended April 30), sales tax revenues were up 7.2% in fiscal 2011 and 14.4% in fiscal 2012. The large increase in fiscal 2012 partially reflected a catch-up payment, so though fiscal 2013 experienced a 6.4% decline in sales tax revenues from fiscal 2012, fiscal 2013 collections were still up from past levels. Fiscal 2014 collections are up thus far as well. The village's share of the state income tax makes up 10% of general fund revenues.
Management also implemented a utility tax in fiscal 2011 that yielded $4.1 million to the general fund ($1.7 million for operations and $2.4 millions for fire and police pensions) and a total of $5.5 million across all funds. Utility tax revenue was down 6.6% in fiscal 2012 due to an unseasonably warm winter. As a home rule municipality, the village has very good revenue raising capacity and there are several taxes that Skokie does not utilize that most neighboring communities do. The village actively manages expenses, including maintaining a hiring freeze since late 2008.
RECENT DECLINE IN RESERVES A CONCERN
After several years of sizable fund balance declines, in fiscal 2012 the village had an operating surplus (after transfers) of $725,000 (1.4% of expenditures). This increased its unrestricted fund balance to $8 million or 15.4% of expenditures. Unaudited results for fiscal 2013 show another modest surplus of $163,000 (0.3% of expenditures). For close to two decades the village has maintained an unreserved/unrestricted fund balance in the range of 25%-40% of spending, which was viewed as an important factor in the village's exemplary 'AAA' rating, particularly given its reliance on economically sensitive sales tax revenue.
Further exacerbating Fitch's concern about the declining reserve position is that the village underfunded its pension ARC by $4.8 million in aggregate from fiscal years 2009-2012.
Fitch expects the village to restore its fund balance back towards its goal level of 25% while also improving annual pension funding levels in order to stay at the current rating level.
ELEVATED DEBT BURDEN; UNDERFUNDED PENSIONS
Skokie's overall debt level is moderate at 4.1% of full value but somewhat weaker on a per capita basis at $4,788. Fitch notes that almost 80% of the debt burden consists of debt issuances of overlapping entities. Outstanding debt amortizes rapidly, with 75% maturing in 10 years. The village has no additional debt planned.
The village manages pension plans for fire and police and participates in the state's municipal retirement plan. Using Fitch's assumed 7% rate of return, the fire plan is funded at a weak 59.5% while the police and state plans are at a stronger 70.3% and 76.2%, respectively. Management notes that its goal is to improve funding for the police and fire plans to 90% by 2020. As noted above, Fitch would view concrete efforts towards this goal, in addition to the recent implementation of the utility tax, favorably. The village's implicit rate subsidy for other post-employment benefits (OPEB) results in a low unfunded actuarial liability of $5.7 million as of April 30, 2011. Carrying costs for debt service, pensions and OPEB are moderate at 22.6% of governmental fund expenditures (minus capital).
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria