Fitch Affirms Illinois Unemployment Fund Building Receipts Bonds at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA+' rating on the following Illinois Department of Employment Security Unemployment Insurance Fund building receipts revenue bonds:

--$515.565 million series 2012A;

--$707.865 million series 2012B.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a first lien on 'fund building receipts,' a portion of state employer contributions to the unemployment insurance system. The fund building rate is set at .55% for the life of the bonds on a statutorily determined wage base.

KEY RATING DRIVERS

PLEDGED TAX IS BROAD AND PREDICTABLE: The source of bond repayment is a .55% assessment levied on all contributing Illinois employers against a statutorily set wage base.

CONSERVATIVE BOND STRUCTURE: The bonds have been structured to well within the expected revenue stream with excess collections used for early redemption of bonds. Amortization is rapid and expected to be accelerated even under a recession scenario.

BONDS ARE SEPARATE FROM OPERATIONS OF THE STATE: Pledged revenues are deposited in a segregated account, separate and distinct from funds of the state.

STRONG LEGAL PROTECTIONS: Additional borrowing is limited by a 1.5x revenues test and may only be issued if at least 75% of the current offering has been retired. The Financing Act constitutes an irrevocable and continuing appropriation of the fund building receipts for the purposes of the Act, including payment of principal and interest (P&I) on the bonds.

LIQUIDITY PROTECTIONS: The highly seasonal nature of unemployment tax collections is mitigated by a requirement to retain $25 million plus an amount necessary to provide 150% of the second semi-annual debt service payment, taking into account expected fund building receipts for the balance of the year. Further, payment into the bond fund is from the broader collection of unemployment taxes with quarterly adjustments to reflect actual collections.

STRONG COLLECTIONS AND ENFORCEMENT: The state's unemployment tax collection mechanisms are well-established, with a collection rate of approximately 98%. The pledged fund building rate is collected in the same manner, and subject to the same penalties, as other unemployment taxes.

ECONOMY A CREDIT STRENGTH BUT RECOVERY IS SLOW: The Illinois economy is broad and wealth levels are above average, although the economy tends to be vulnerable to cyclicality.

CREDIT PROFILE

The 'AA+' rating reflects the healthy debt service coverage provided by a pledged portion of required unemployment insurance payments by employers to the Illinois Department of Employment Security, sound legal provisions, and a conservative debt structure that accelerates debt retirement with excess collections.

The bonds, which were issued to repay advances taken by the state from the federal government to cover a deficit in the state's unemployment trust fund, are secured by a first lien on 'fund building receipts,' a portion of state employer contributions to the unemployment insurance system. The fund building rate is a separate levy, charged to contributing Illinois employers at the same time and in the same manner as the state's other, longstanding unemployment assessments. The fund building rate, which has been collected since 1988, has varied from .4% to .9% and is set at .55% for the life of the bonds on a statutorily determined wage base. The fund building rate generated $333.8 million in calendar 2013, providing ample coverage of debt service requirements and permitting significant early redemption. Bonds may be additionally paid from other legally available funds in the UTF, to be utilized subject to federal limitations, if fund building revenues are insufficient 10 days prior to any principal payment.

SEPARATION FROM STATE GENERAL OPERATIONS

Legal provisions are strong, with pledged revenues deposited in a segregated account, controlled by the Department of Employment Security, separate and distinct from other funds of the state. Additional borrowing is limited by a strong additional bonds test that requires both 1.5x coverage of projected debt service by existing revenues and repayment of at least 75% of the current offering prior to issuance. No additional action is required for repayment of the bonds, as the Financing Act constitutes an irrevocable and continuing appropriation of the fund building receipts for the purposes of the Act, including payment of debt service on the bonds. Strong non-impairment language limits the ability of the state to reduce either the fund building rate or the wage base upon which it is levied.

WELL-ESTABLISHED COLLECTION MECHANISM

The bonds benefit from the well-established nature of the state's unemployment assessment system. Contributing Illinois employers pay a variety of levies to the state's unemployment trust fund from which state benefits are paid, with components based on their benefit experience, the status of the state fund, and whether the state has federal advances outstanding. Historical collection experience is very strong, with approximately 98% of taxes due being collected. The system has been in operation for decades, with the legislature making periodic adjustments to benefits, the taxable wage base, and other factors. None of the other levies are pledged to bondholders.

All unemployment taxes are payable by contributing Illinois employers on a quarterly basis and due by the 30th of the month after the end of a quarter. Approximately 60% of all collections are received in the first half of the year, the vast majority of which reflects workers' January-March wages. The bonds' structure takes into account the seasonality of collections. Principal and interest are due on June 15 and December 15, with a larger debt service payment on the June 15 date. Excess collections are directed to early redemption after transfers for debt service and retention of at least $25 million plus an amount necessary to provide 150% of the second semi-annual debt service payment, taking into account expected fund building receipts for the balance of the year. As planned, the state has fully redeemed the series C bonds from excess collections and will redeem a portion of the series B bonds on June 15, 2014. The retention mechanism ensures sufficient revenues for debt service in the event of taxable wage decline well beyond the level experienced by the state in the last downturn.

MODERATE ECONOMIC GROWTH

The Illinois economy is centered on the Chicago metropolitan area, which is a nationally important business and transportation center and the nation's third largest. Illinois' economy has gradually shifted, as has the U.S. in general, away from manufacturing toward professional and business services. The remaining manufacturing sector includes more resilient non-durables, and is less concentrated in the auto sector than are surrounding states (Indiana, Michigan, and Ohio).

Illinois' job recovery continues to be weaker than the national recovery; non-farm employment grew 0.6% as of April 2014 while the U.S. grew 1.8%. The state's unemployment rate has typically exceeded that of the U.S. over the past decade and was 130% of the U.S. rate at 7.9% as of April 2014. Wealth levels remain above average. Per capita income is 105% of the national average, fifteenth among the states.

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

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', Aug. 14, 2012.

--'U.S. State Government Tax-Supported Rating Criteria', Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834594

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop, +1 212-908-0661
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Kim, +1 212-908-0241
Director
or
Committee Chair
Marcy Block, +1 212-908-0239
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Karen Krop, +1 212-908-0661
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Kim, +1 212-908-0241
Director
or
Committee Chair
Marcy Block, +1 212-908-0239
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com