NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following City of Evanston, Illinois (the city) unlimited tax general obligation (ULTGO) bonds:
--$29,625,000 general obligation (GO) refunding bonds, series 2013B.
The bonds are scheduled for competitive sale on Oct. 30, 2013. Proceeds will be used to current refund GO bonds series 2004, series 2004B and series 2005 for a net present value savings of approximately $3.5 million.
In addition, Fitch affirms the following ratings:
--Approximately $154.1 million in outstanding GO bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by the city's full faith and credit and its ad valorem tax without limitation as to rate or amount.
KEY RATING DRIVERS
HEALTHY RESERVES DESPITE DEFICITS: The city maintains sound reserves despite generating several operating deficits after transfers over the past five years. Positively, the city's home rule status provides significant financial flexibility, of which the city has not chosen to take full advantage.
STRONG AND DIVERSE ECONOMY: Evanston's advantageous location provides abundant employment opportunities both within the city and throughout the Chicago metropolitan region.
SUPERIOR SOCIOECONOMIC FUNDAMENTALS: Residents display a superior socioeconomic profile reflecting high wealth, employment and education levels.
MANAGEABLE DEBT LEVEL: The aggregate debt burden appears manageable and future capital needs are reasonable, although carrying costs for debt service and other long-term liabilities are high.
SIZEABLE UNFUNDED PENSION LIABILITIES: Despite management's efforts to reduce the sizeable unfunded liability in the city's police and fire plans through periodic supplemental contributions, the systems are severely underfunded.
FAILURE TO REDUCE PENSION LIABILITY: A lack of demonstrated, meaningful results of the city's efforts to address its large pension liability in the intermediate term or lack of full funding of its required pension contribution could continue to pressure the outlook and/or rating.
INABILITY TO MAINTAIN SOLID RESERVES: The city's ability to eliminate reliance on reserves for budget balance and maintain reserves above city policy levels is key to the current rating category.
The city is contiguous with Chicago and is approximately 13 miles from downtown. Evanston is a home rule municipality under Illinois statute, and as such it has no tax rate or debt limits, nor is it required to conduct a referendum to authorize the increase of debt or the imposition of property taxes. The 2012 population estimated at 75,430 has remained fairly steady, increasing by 1.6% since 2000.
PRIME LOCATION SUPPORTED BY EXCELLENT SOCIOECONMIC FUNDAMENTALS
In addition to abundant employment opportunities throughout the Chicago metropolitan area, the city's local economy is strong, anchored by Northwestern University, which employs over 10,000 people and educates approximately 9,200 students. Additionally, Northshore University Healthcare and St. Francis Hospital with approximately 4,377 and 1,176 employees, respectively, provide stability. Despite being negatively skewed by the student population (about 10%), per capita and median household income, as well as market value per capita levels are well above state and national averages. Residents are highly educated with 65% of the population attaining at least a bachelor's degree versus 28% nationally. The city's unemployment rate has historically been below those of the state and U.S.
The city's tax base is primarily residential with Northwestern and the hospitals representing a sizeable amount of tax exempt value. The tax base experienced sizable reductions of 10.3% and 7.8% in 2011 and 2012 due to the decline in housing values.
HEALTHY RESERVE LEVELS DESPITE OPERATING DEFICITS
The city's revenue base is diverse with property taxes and intergovernmental funds the largest components representing approximately 12% each of general fund revenues. The city is also reliant on sales, utility surcharge, and income taxes. As a result of these economically sensitive revenue sources, Evanston's financial performance weakened slightly during the protracted national recession. Management prudently budgeted for these declines and implemented cost cutting measures, as well as using small amounts of reserves to fund operations.
For the year-end Dec. 31, 2012, the city recorded a $1.4 million (1.6% of spending) general fund operating deficit after transfers. The deficit was a result of planned increases in transfers to the library, capital improvement and solid waste funds. The unrestricted general fund balance totalled $17 million or a healthy 20.2% of spending.
Management estimates for 2013 show general fund revenues performing at slightly over 100% of budget and expenditures projected at 1.8% below budget, producing a small operating surplus of approximately $2 million. After transfers aggregating $1.4 million to the capital projects, insurance and fleet funds, the ending general fund balance is estimated to be $17.6 million, or 21% of general fund spending, comparable to year-end 2012.
The proposed 2014 budget totals $252.3 million, less than a 1% increase from the 2013 approved budget, with a small general fund surplus of $231,000. The proposed budget includes no increase in property taxes for the general fund operating levy and no layoffs.
SIGNIFICANT UNFUNDED PENSION LIABILITY
The city provides pension benefits to its public safety employees through two single employer plans and a state-sponsored plan for most other employees. As of Jan. 1, 2013, both the city's police and fire pension plans remain severely underfunded at 47% and 46%, respectively, using a 7% discount rate. As of Dec. 31, 2012, the state plan, the Illinois Municipal Retirement Fund, was better-funded at 77.7% or an estimated 73.6% using Fitch's 7% discount rate assumption. The aggregate unfunded actuarial accrued liability for all three plans totaled $177.5 million or a sizable 2.2% of full market value.
Management has been pro-active in addressing its pension liability. Although the police and fire plans are single employer plans, benefits and employee and employer contribution rates are established by state statutes. The city has consistently exceeded the minimum employer contribution amounts and recently has exceeded the actuarially required contribution (ARC). In fiscal 2009, the city made a $4.5 million supplemental pension payment. More recently, the 2013 budget included a combined funding increase of $500,000 for the police and fire plans in comparison to the actuarially recommended level. The proposed 2014 budget includes funding the police and fire pension plans at a level that is $3.83 million above the minimum funding required by the state statute. The city will also reduce the interest rate assumption from 7% to 6.75%. The city uses an unlimited levy to finance payments to the police and fire pension plans. This levy has increased to fund the higher pension contributions while the city's control of general fund costs has mitigated the overall levy increases.
While management continues to address the pension liability through more conservative actuarial assumptions resulting in higher contributions, this liability will continue to pressure budgetary operations. Fitch believes tangible long-term results from the city's active management of its pension liability is key to rating stability.
MANAGEABLE DEBT POSITION
Aggregate debt ratios are manageable at $4,871 per capita and 4.5% of full market value especially given the city's relative affluence. Maximum annual debt service (MADS) as a percentage of general fund spending is extremely high at 26%. However, approximately 37% of the direct debt obligation is self-supporting from various sources including tax increment revenues, special assessments, and utility fees and charges. Fitch expects the city's debt burden to remain manageable given rapid debt amortization (71% retired in the next 10 years) and moderate future borrowing.
Exposure to other post-employment benefits (OPEB) is limited as it consists of an implicit rate subsidy for retirees. However, the city's carrying costs for debt, pensions and OPEB for 2012 were high at 27% of government fund spending reflective of the above-average level of liabilities burden but also rapid amortization and pension contributions above the ARC.
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 Creditscope, CoreLogicCase-Shiller Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria,' dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria