Fitch Rates Chicago Park District, IL's GOs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the following Chicago Park District, IL (the district) limited tax general obligation (LTGO) bonds:

--$46.83 million LTGO park bonds, series 2015A;

--$65.05 million LTGO refunding bonds, series 2015B;

--$15.755 million LTGO refunding bonds, series 2015C;

--$28.24 million ULTGO refunding bonds, series 2015D (personal property replacement tax alternate revenue source).

The bonds are expected to sell via negotiated sale the week of Aug. 24. Proceeds will be used to finance various capital projects and refund outstanding bonds.

In addition, Fitch affirms the 'AA-' rating on the district's outstanding LTGO and unlimited tax general obligation (ULTGO) bonds.

The Rating Outlook remains Stable.

SECURITY

The LTGO Bonds are general obligations of the district payable from ad valorem taxes levied without limitation as to rate but limited as to amount by provisions of the statewide Limitation Law on all taxable property within the boundaries of the district.

The ULTGO Bonds are general obligations of the district, payable from ad valorem taxes, unlimited as to rate or amount.

KEY RATING DRIVERS

IMPROVED PENSION FUNDING MECHANISM: The district has begun implementing a state-approved pension funding formula that materially improves the district's pension outlook from the previously projected asset depletion date of 2023. A limitation of the new plan is statutory rather than actuarial funding under the new plan.

LIMITED PURPOSE; STRONG FINANCES: The 'AA-' rating indicates high credit quality reflecting the district's limited purpose and inherent expenditure flexibility. The district maintains strong reserves supported by conservative fiscal management and budgeting.

DIVERSE AND STABLE SERVICE AREA: The city of Chicago, while showing signs of economic pressure, is broad and diverse and is the economic hub of the state.

PRESSURED OVERLAPPING ENTITIES: The district's overlapping entities, particularly the City of Chicago, Chicago Public Schools and Cook County, all face notable financial challenges stemming from pension underfunding, which could pressure the district's tax base. Importantly, the district's proportional tax levy is a low 6%.

RATING SENSITIVITIES

PENSION CHANGE REVERSAL: Successful legal challenges reversing the net positive credit impacts of pension reform would likely have a negative impact on the rating.

CREDIT PROFILE

The district was created in 1934 with a tax base coterminous with the city of Chicago (rated 'BBB+', Negative Outlook). It is one of the largest municipal park districts in the world, comprising 8,300 acres of green space in 585 parks, 231 field houses and 26 miles of lakefront property. Private cultural institutions that operate facilities on district property include the Museum of Science and Industry, Field Museum of Natural History, DuSable Museum of African American History, Adler Planetarium, John G. Shedd Aquarium, and the Art Institute of Chicago.

PENSION REFORM EXPECTED TO GRADUALLY REDUCE LIABILITY

The district maintains a single-employer defined pension plan that is governed by state law. Pension costs are funded on a statutory basis which was a low 32% of the ARC in 2014. The difference between the district's actual statutory payment and the ARC for 2014 was approximately $24 million or 9% of spending. At the same time, the unfunded liability totaled $507 million or 0.3% of market value with a plan funded level of approximately 41% using Fitch's adjusted 7% discount rate.

In January, 2014, the district received required state approval for a new funding formula to begin in 2015. Contribution rates for both the district and employees increase at periodic intervals, the retirement age for the majority of district employees is raised, and the cost of living adjustment is lowered. The first contribution rate increase is now being used.

The plan calls for $12.5 million supplemental district contributions in 2015 and 2016 and a $50 million contribution in 2019. The first two contributions will be funded from reserves. The 2015 payment under the revised formula, including the $12.5 million supplemental contribution, is 84% of the ARC. Actuarial projections show a 100% funded level in 40 years, a reversal from projected plan insolvency by fiscal 2023 pre-reform.

Contributions continue to be calculated on a statutory, rather than an actuarial basis leaving the plan challenged to recover from potential large investment losses given no method to adjust contribution levels. However, Fitch believes the increased contribution levels and other changes to the plan materially improve the plan's ability to withstand such a stress, compared to the prior funding plan.

Thus far, no lawsuits have been filed regarding the district's plan, but the district's largest union (SEIU) recently announced their intent to challenge. While other suits have struck down city and state plan changes, those plan revisions were not identical to those implemented by the district.

OVERLAPPING ENTITIES ALSO FACE CHALLENGES

The district receives almost 60% of its general fund revenues from property taxes. The largest taxing bodies that overlap with the district, Cook County, the city and Chicago Public Schools, are all facing notable financial pressures, particularly regarding pensions.

Fitch believes it will be politically challenging for all of these issuers to simultaneously raise taxes to fully support operations, further pressuring the district. Additionally, though the district is independent of the city, its board is appointed by the city, and Fitch is concerned that pressure could be exerted on the district to let the city's needs trump those of the district, though currently, the board makes these decisions autonomously.

The district's property tax levy makes up only about 6% of the total tax bill for a Chicago resident. Property tax increases, under the Limitation Law, are restricted to the lesser of 5% or the percentage increase in the Consumer Price Index. The district did successfully increase its property tax rate for 2014 but kept rates flat in 2015. The district continues to implement new revenue enhancing initiatives and closely manage expenditures while continuing its core mission of increasing service offerings to residents.

HIGH RESERVES & SPENDING CONTROL SUPPORT FINANCIAL FLEXIBILITY

The district finished 2014 with an $18.6 million surplus, increasing unrestricted fund balance to $203 million or a high 73% of expenditures. The surplus was driven by growth in property tax revenues, increased utilization of Soldier Field, and the transfer in of surplus funds. The district continues to implement new revenue enhancing initiatives and closely manage expenditures while continuing its core mission of increasing service offerings to residents.

The 2015 budget included a flat property tax rate and conservative assumptions for other revenue sources. Currently, the district is on budget or slightly ahead for most revenue and expense items, with notable growth in personal property replacement tax (PPRT) revenues. The district has prudently identified sources to pay for elevated recurring pension costs beginning in 2015, including debt service savings, PPRT and other revenues, and organizational efficiencies. Revenues that the district receives from the Illinois Sports Facilities Authority (ISFA) that are paid to ISFA from the state might be delayed because the state has not passed a budget. The potentially delayed payments would represent a small percentage of the district's overall budget.

Given the district's limited purpose, Fitch believes it has greater expenditure flexibility than most full-service governments. Specifically, the district's ability to delay or cut projects from its capital plan and reduce staffing, approximately half of which is part time, is inherently greater than other governmental entities.

ELEVATED BUT MANAGEABLE DEBT LEVELS

The district's debt position is manageable, with a mix of limited and unlimited tax GO debt, as well as alternative revenue-source bonds. Debt service has a relatively high claim on resources, accounting for 18% of 2014 expenditures, which is not unusual for capital intensive special districts.

The district's overall debt level is above average, reflective of substantial borrowing by overlapping jurisdictions. Debt amortization is average with 50% of debt retired in 10 years. The district's five-year capital plan anticipates manageable additional debt issuance, which should be structured to fit within the existing levy and to allow for future borrowing.

The district has minimal other post-employment benefit (OPEB) costs for retired employees. Total carrying costs for pension, debt service and OPEB in 2014 were a moderate 22% of government fund expenditures assuming the district had paid its full pension ARC rather than the statutory payment. Importantly, and consistent with other limited purpose entities, debt service costs make up the majority of carrying costs. Debt service totaled 16% of 2014 spending. Fitch believes the district is relatively well positioned to adjust its budget to meet the incremental increase to reach the new statutory payment requirement.

CHICAGO SERVES AS ECONOMIC HUB

Chicago serves as the economic and cultural hub for the Midwest region, and maintains good prospects for long-term stability if not growth. The city has gained almost 50,000 jobs since 2010 primarily in professional and business services despite reductions in both manufacturing and public service. Chicago's population totaled 2.7 million in 2014, down 6% from the 2000 census, but still accounts for 21% of the state's population. Socioeconomic indicators are mixed with elevated unemployment and individual poverty rates, average per capita income levels, but strong educational attainment levels.

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

In addition to the sources of information identified in the 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

Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989605

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989605

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst:
Eric Friedman, +1-212-908-9181
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Eric Friedman, +1-212-908-9181
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com