NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Lake Zurich Community Unit School District (the district) ratings:
--$31.9 million school building GO bonds, series 2000B at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are supported by the county's full faith and credit and ad valorem taxing power, without limitation as to rate or amount.
KEY RATING DRIVERS
STRONG RESERVES; POSITIVE OPERATING MARGINS: The district has maintained strongly positive operating margins for at least the last eight years, bolstering formidable reserve levels to offset unexpected financial pressures.
PRUDENT MANAGEMENT: Management has prudent policies, budgets conservatively, and actively manages expenditures, allowing the district to comfortably manage state-imposed property tax levy limitations.
AFFLUENT RESIDENTIAL ECONOMY: The district's economy is affluent, with above-average wealth and income levels, benefiting from the broad employment base of nearby Chicago
MANAGEABLE LIABILITY PROFILE: Debt levels are moderate, benefiting from rapid principal amortization and historically limited capital needs. Pension and other post-employment benefit costs are currently minimal, and total carrying costs, including debt service and retiree benefits, are low.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The district is located in Lake County, 37 miles northwest of downtown Chicago, with a 2013 population of 33,010. The district serves primary and secondary students of the affluent communities of Lake Zurich, Deer Park, Hawthorn Woods, Kildeer and North Barrington.
SUBSTANTIAL FINANCIAL FLEXIBILITY
Conservative budgeting and careful expenditure controls have preserved strong operating margins with additions to fund balance in each of the last eight fiscal years, bolstering ample reserve levels. Financial performance has remained favorable despite regular use of general fund resources for capital spending and limited revenue flexibility under the state's tax levy cap.
The district added $4.8 million or 6.5% of general fund spending to fund balance in fiscal 2014 (unaudited), driven by a favorable variance in personnel costs. In fiscal 2014, general fund balance totaled $34 million, nearly all of which was unrestricted, equaling an ample 46.5% of general fund spending.
The district budgeted a modest $81,000 surplus for fiscal 2015, and management currently projects favorable momentum due to further salary and benefits savings, consistent with the district's historically strong performance. The budget prudently continues the district's practice of levying to the state limit, while using general fund resources for capital financing.
AFFLUENT ECONOMIC BASE
Wealth levels and housing values in the communities served by the district greatly exceed county and state medians. The district's tax base, with a market value of $4.4 billion, has declined 18.4% since its peak in fiscal 2010. Market value per capita remains strong at approximately $140,000 in 2014. The county assessor expects taxable value to stabilize in fiscal 2015 with modest growth of 1%.
The district's resident income levels consistently exceed county, state and national averages by a comfortable margin with a low individual poverty rate. Unemployment in Lake County declined to 5.9% in September 2014 from 8% the year prior, remaining below the state (6.2%) but above the nation (5.7%), which is consistent with historical trends.
Enrollment has declined by a sizable 11.2% over the past eight years, to 5,693 in 2014-15, which prompted the closure of a school in fiscal 2010. This decline is inconsistent with a relatively stable population (0.2% growth between census 2000 and 2010). Recent declines have been considerably less than management projections, moderating in recent years; further school closures are currently not contemplated. Per-pupil funding is a modest $360 per pupil; therefore Fitch believes the financial impact of further declines, unless they accelerate, is likely to be manageable.
STATE PENSION REFORM MAY COST-SHIFT TO DISTRICT
The district participates in the Teacher's Retirement System of the State of Illinois (TRS), contributions to which are currently made on behalf of the district by the state, and the Illinois Municipal Retirement Fund (IMRF). TRS has a fiscal 2013 reported funded ratio of a very weak 40%, or 37% based on the more conservative 7% discount rate assumption used by Fitch. The district also participates in the state-run retiree health care plan, making a minimal $273,000 payment in fiscal 2014.
In November 2014, the Sangamon County Circuit Court ruled the state's 2013 TRS reform legislation unconstitutional, holding the current plan provisions and funding structure in place. The reform legislation included reductions in retiree benefits and lower state contributions. Other reform proposals have included a shift of additional funding responsibility to local participants, though these ultimately did not receive adequate legislative support, and management indicated preparedness to adequately budget for any pension contribution increases in future years. Fitch is concerned that the magnitude of district payments both to replace the state's payments and to increase funding to improve the poor funded ratio could be significant. However, Fitch believes that the district could manage this additional cost given its overall financial flexibility and low relative taxes.
AVERAGE DEBT; LOW CARRYING COSTS
The district's fiscal 2015 overall debt burden is on the low side of the moderate range at $2,998 per capita and 2.2% of market value. Amortization is very rapid, with retirement of all principal in 10 years and affordable debt service of 7.95% of governmental fund expenditures in fiscal 2014. The district has no near-term plans to issue additional debt and will continue to prudently fund short-term capital needs from current financial resources. Total carrying costs, including debt service, pension, and retiree health care spending, equal a low 9.3% of governmental fund spending in fiscal 2014.
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.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=962095
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