NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following Community College District Number 508, City Colleges of Chicago, IL (the district) bonds:
--$250 million unlimited tax general obligation bonds (dedicated revenues) series 2013.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of tuition and fee revenues and state grant revenues. The bonds also carry the district's unlimited tax general obligation (ULTGO) pledge.
KEY RATING DRIVERS
DUAL ULTGO/REVENUE PLEDGE: Primary support for the 'AA-' rating is derived from the district's ULTGO pledge, although the district anticipates continuing to pay debt service from other sources and abating the levy each year.
SOLID FINANCIAL PROFILE: The district's revenue base is diverse yet dependent on federal and state revenue. Financial operations are strong and have allowed for the buildup of sizable reserves. Board-designated capital reserves are expected to be drawn down over the next four years to help fund the capital program; however, Fitch expects adequate reserves will be maintained.
MANAGEABLE LONG-TERM LIABILITIES: Direct debt levels are low when measured against the substantial tax base, but overlapping borrowing drives overall debt burden to very high levels. State-wide pension reform legislation may result in a shift of pension costs from the state to the district. Fitch believes such a shift would be gradual, and manageable.
SLOWLY IMPROVING ECONOMY: Chicago serves as an economic hub for the Midwestern region of the United States. Tax base recovery has been slow, but employment trends are showing improvement.
RATING SENSITIVITIES
REVENUE VOLATILITY: The district is highly dependent upon state and federal sources for operations. A material change in the distribution framework for such revenues would likely have a negative effect on the rating.
STATEWIDE PENSION REFORM: Direct impact on the district from any potential pension reform package is expected to be gradual and manageable. However, the effect on overlapping jurisdictions could be more significant and may indirectly negatively impact the district's overall long-term liability profile and revenue flexibility.
USE OF RESERVES FOR CAPITAL PLAN: The district anticipates applying a significant amount of its reserves to the capital program over the next five years. Should the amount of reserves actually drawn materially differ from expectations, the overall financial profile may be altered and trigger a rating change.
CREDIT PROFILE
The district is coterminous with the city of Chicago and provides community college educational services to the Chicago metropolitan area. It is the third largest community college district in the nation, with seven colleges and six satellite sites. The district employs 5,500 faculty and staff, and currently serves 109,358 students, or 45,261 full-time equivalent enrollment.
DUAL ULTGO/REVENUE PLEDGE
The series 2013 bonds feature an 'alternate bond' structure, with a revenue pledge of tuition and fee revenue and state grant revenue, supplemented by the district's ULTGO pledge. The debt service tax levy may only be abated if the trustee certifies that funds are on deposit sufficient to satisfy the annual debt service requirement, prior to the levy extension. Otherwise, the debt service levy shall be levied and deposited directly with the trustee into the pledged taxes account.
The 'AA-' rating relies primarily on the strength of the district's ULTGO pledge, although the pledged revenues also provide adequate support. Fitch calculates gross MADS coverage by 2014 net revenues at 4.6x. Net income available for debt service provided 1.7x MADS coverage in 2014.
DIVERSE BUT DEPENDENT REVENUES; SOLID FINANCIAL PROFILE
The district's revenue base is relatively diverse. In fiscal 2014, state appropriated funds (including pension on behalf payments) contributed 24.3% of operating revenues, property taxes 25.7%, net tuition a relatively low 9.4%, and government grants and contracts (including substantial PELL grants), 35%.
Reliance on federal funding is relatively high compared to peer institutions. Revenue flexibility is somewhat limited, as increases in the operating property tax levy are limited to the lesser of 5% or the CPI. However, tuition rates are competitive and represent a potential source of flexibility.
The state of Illinois' budget impasse has interrupted the monthly distributions of the district's base operating grant. Management has adjusted the liquidity of the district's portfolio to compensate for a scenario assuming no grant distributions for the remainder of 2015. The budget impasse has also caused the district to halt one construction project (Olive Harvey Campus) until payments resume.
Operating trends generally have been positive, with surpluses generated in four of the past five years resulting in the buildup of ample reserves. The operating surplus in fiscal 2014 amounted to a modest $ 0.9 million. Available funds, defined by Fitch as cash and investments less restricted net assets, was approximately $317 million at June 30, 2014, equal to 68.8% of unrestricted operating expenses and 127% of bonded debt. This compares favorably to peer community college institutions.
The district anticipates drawing down approximately $188 million of its reserves over the next four years as part of the current capital program, but Fitch expects adequate reserves to be maintained.
Fiscal 2015 operating results are not yet available, but updated forecasts show tuition and state revenues coming in under budget, offset by underspending of budgeted expenditures. The fiscal 2016 budget is balanced without fund balance appropriated. Fitch expects operating results to be positive over the next several years, as the district anticipates deriving $59 million for the capital program from operations.
MANAGEABLE LONG-TERM LIABILITY OUTLOOK
The district's high overall debt burden of 10.7% or $7,336 per capita is largely reflective of borrowing by overlapping jurisdictions. The district's direct debt amounts to a very modest $97 per capita or 0.1% of taxable market value. Principal payout is slow, with of 34% scheduled for repayment in 10 years. No further borrowing is anticipated within the five year capital planning period.
The district's current responsibilities for post-retirement benefits are quite modest, as the state pays the vast majority of the pension payment, totaling about $68.1 million in fiscal 2014, or 14.8% of spending. The OPEB paygo amount represented a small 1.5% of 2014 spending. Fiscal 2014 debt service was a modest 2.9% of spending.
The state legislature is considering wide-ranging pension reforms, which may result in the district assuming greater responsibility for its pension payment. The district is prudently planning for this potentially increased payment under budget assumptions that show a gradual implementation schedule.
Fitch judges carrying costs for long term liabilities to be manageable for the district, even conservatively assuming immediate full payment of the actuarially based pension contribution, with no offsetting employee contribution. Other transition options could result in much lower carrying costs for the district.
The district's exposure to pension liabilities is limited, but that is not the case for other overlapping units of government that share the same tax base. Many of these area governments have severely underfunded pension systems which will likely require drastic funding increases in the near to medium term, potentially resulting in greater pressure on the property tax base.
Fitch is concerned about the cumulative effect of severely underfunded area pension systems on all Chicago area governments but believes the district is more insulated than most due its relatively limited reliance upon property taxes and its very small share of the overall property tax levy.
SLOWLY IMPROVING ECONOMY
Chicago (rated 'BBB+'/Outlook Negative by Fitch) serves as the economic and cultural hub for the Midwest region, benefitted by a highly educated workforce. Housing values have been slow to recover and a lag in assessments has delayed increases in assessed value.
Employments trends have been showing signs of improvement. The May 2015 unemployment rate was a 6.7%, a full percentage point lower than that recorded a year prior. The year over year improvement reflects moderate employment growth outpacing more modest growth in the labor force.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
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, National Association of Realtors.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990837
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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