NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following city of Elgin, Illinois (the city) general obligation (GO) bonds:
--$6.735 million GO refunding bonds, series 2015A;
--$1.585 million taxable GO refunding bonds, series 2015B.
The bonds are expected to be sold via negotiated sale the week of April 6. Proceeds will be used to refund outstanding bonds.
In addition, Fitch affirms the following ratings on the city:
--$88 million GO bonds at 'AAA';
--$5 million Illinois Finance Authority (IFA) local government program revenue bonds, series 2013C (city of Elgin project) at 'AAA'.
The Rating Outlook is Stable.
The bonds are payable from the general obligation, unlimited tax pledge of the city. The bonds issued through the IFA are limited obligations of the authority, ultimately paid by the full faith and credit and unlimited tax pledge of the city.
KEY RATING DRIVERS
STRONG FISCAL MANAGEMENT: Elgin's conservative fiscal management, extensive financial planning and healthy reserve levels provide ample financial flexibility.
DIVERSIFIED REVENUE STREAM: The city prudently implemented several new revenue sources in 2012 to reduce dependence on property taxes and potentially volatile gaming revenues.
MODEST DEBT BURDEN: The city's low direct debt burden reflects the use of riverboat casino revenues for capital expenditures and the issuance of self-supporting debt. Notably, all of the city's non-self-supporting debt is retired within 10 years.
DECLINING VALUES: After an extended period of rapid expansion fueled by annexations, the city's growth has tapered off. Lack of new annexations and minimal development of recently annexed lands has resulted in declines in equalized assessed value (AV). The city has recently seen a rebound in development that should reverse this trend.
BELOW-AVERAGE PENSION FUNDING: Pension funding levels have historically been low despite the city's practice of fully funding its statutory required contributions. Fitch expects recent benefit changes and over-funding of the actuarially required contribution (ARC) will help improve the funded positions of the city's pension plans over time.
The rating is sensitive to shifts in fundamental credit characteristics. The Stable Outlook reflects Fitch's expectation that such shifts are not likely.
Elgin is located 40 miles northwest of downtown Chicago and benefits from its proximity to the city. Approximately 80% of the city's AV is in Kane County, and 20% is in Cook County. Elgin's population grew 14.5% since 2000 to 108,188 in 2010.
HISTORY OF ANNEXATIONS SLOWS
The city maintains a relatively broad employment base that includes health, business and professional services and retail sectors. The unemployment rate in November 2014 was an above-average 6.5%, which is down from 9.3% a year earlier but still above state and national levels.
AV has declined 25% over the last five years but is expected to level off. The city has historically actively annexed adjacent areas to fuel growth, with over 8,200 acres added from 2000 to 2009. Annexations have since tapered off and a large development project in the western part of the city has made some recent progress. The city had an uptick in permit activity which should help improve AV levels, and recent growth in home prices should also help.
DIVERSIFYING REVENUES TO HELP MAINTAIN FINANCIAL FLEXIBILITY
After over 10 years of flat property taxes, rates were raised slightly in 2012 to offset declines in AV. However, total general fund property tax revenue went down $1.6 million (4.7%). Property tax revenues were reduced another 17% in 2013 as rates were lowered and AV declined, and were again down slightly in 2014. There is a small increase in property taxes in 2015, with 5% levy increases planned for 2016 and 2017 that will be funded through expected increases in AV and increases in the tax rate if necessary. In 2013, the property tax made up 30% of general fund revenues.
Beginning in 2012, the city prudently initiated alternative sources of revenue to offset declines in property tax revenues and diversify its revenue streams. As a home rule city, Elgin has significant flexibility to adjust tax rates as necessary. The city implemented a refuse collection fee, taxes on natural gas, electricity, and alcoholic beverage sales, and an increase in the existing sales tax rate, yielding $16.2 million in 2013, $12.3 million of which went to the general fund.
SURPLUSES CONTINUE IN 2013 FOLLOWED BY PLANNED DECLINES
The city has consistently maintained high unrestricted fund balance levels of over 60% of spending and, despite the property tax revenue declines, had five straight years of operating surpluses from 2009-2013. The city finished 2013 with a $1.8 million operating surplus after transfers, increasing unrestricted fund balance to $73.5 million or 60.1% of expenditures. The surplus was driven by a full year of collections for the new taxes implemented in 2012 and record collections from the income tax and the sales and use tax, offsetting a $5.8 million reduction in property tax revenues and $2.5 million overfunding of pension ARCs.
The city is projecting a $9 million decrease in fund balance in 2014 to a still-high approximately $64.6 million. The property tax levy was reduced by $1 million while the police pension was overfunded by $5 million. The sales tax and income tax were each up over $1 million. General fund spending for capital improvements was up as several long-term projects are being completed in 2014 and 2015.
The 2015 budget assumes a $14 million decline in fund balance. The city will again overfund the police and fire pensions by a total of $5 million, and will be spending funds on the completion of several capital projects. This would reduce the city's general fund balance to approximately 44% of expenditures. Smaller draws are projected for 2016 and 2017, with fund balance remaining above the city's policy level of two months.
LOW DIRECT DEBT LEVELS; CASINO FUNDS CAPITAL PROJECTS
Most of the city's outstanding debt is self-supporting through water and sewer revenues. The city's non-self-supporting direct GO debt is extremely low, but significant overlapping debt brings these levels up to a still moderate $2,363 per capita or 4.4% of market value. Minimal additional debt is planned, and 100% of debt amortizes within 10 years. Direct debt has been kept low through the use of riverboat gaming revenues to finance capital improvement projects. The spend-down of some of these funds is a cause of recent declines in general fund balance. Riverboat gaming revenues make up approximately 13% of general fund revenues.
WEAK BUT IMPROVING PENSION FUNDING
Pension benefits are provided through three primary pension plans: single-employer plans for police and fire administered by the city, and the state-run Illinois Municipal Retirement Fund (IMRF). Elgin's share of IMRF is the smallest of the three plans the city contributes to and the best-funded at 70% as of Dec. 31, 2013, assuming a 7% rate of return. The police and fire plans have consistently been poorly funded but are gradually improving. Using a 7% rate of return, as of Dec. 31, 2013 the police pension is 42.4% funded and fire is 48.8% funded. The adjusted unfunded actuarial accrued liability of $191 million is a somewhat sizeable 2.8% of market value.
Recent changes in pension funding requirements including lower benefits for new hires should make this funding obligation more manageable, but Fitch will monitor funding levels for further declines. The city has been consistently funding at least the ARC, and has recently been making additional contributions that should help lower the liability. Most recently, the police-plan ARC was overfunded by $5 million in 2014 and both police and fire are budgeted to be overfunded by $2.5 million each in 2015, and $1.25 million each per year for 2016 and 2017. Fitch considers this a positive step in the city's effort to lower the liability. Total carrying costs for debt, pension and other post-employment benefits in 2013 were a low 13.3% of government fund expenditures, including payments to overfund the annual required contributions to the pension plans.
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. 15, 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