Fitch Affirms Aurora West School District No. 129, IL's Lease Certificates at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Aurora West School District No. 129, IL bonds at 'AA-':

--$1 million lease certificates series 2003 (qualified zone academy bonds).

The Rating Outlook is Stable.

SECURITY

The certificates are limited tax general obligations of the district, payable from general funds of the district and other lawfully available sources. The certificates are additionally secured by a state aid intercept mechanism (not rated by Fitch).

KEY RATING DRIVERS

LIMITED RESERVES, OPERATING STABILITY: Although current reserves are below the district's policy level, Fitch believes management's plans to rebuild fund balance starting in fiscal 2016 are reasonable. Recent reserve drawdowns have been related to capital spending and a change in the revenue accrual period.

INCREASING CAPITAL NEEDS: Fitch expects debt levels to increase over the next 18 months given voter approval of a large GO authorization.

MANAGEABLE PENSION PAYMENT: The district participates in Illinois Municipal Retirement Fund (IMRF) and Illinois Teachers' Retirement System (ITRS). Although ITRS funding levels are weak, the district is only responsible for a small portion the annual contribution with the state responsible for the majority.

MIXED ECONOMIC PROFILE: District enrollment has increased marginally in recent years and modest growth is expected to continue going forward. Income levels are slightly lower than the state and national average with minimal growth. Employment levels have been improving and are on par with the state and nation.

RATING SENSITIVITIES

FURTHER RESERVE EROSION: Recent drawdowns have reduced reserves to well below the district's recently increased policy level of 10% of spending. Further deterioration of reserves, which Fitch does not expect since a planned use of funds for capital projects is complete, could result in negative rating action.

CREDIT PROFILE

The district is located approximately 40 miles west of downtown Chicago in Kane County. The district's enrollment grew a modest 0.3% in the current school year reaching 12,627 students. Historically, enrollment and population growth have been modest and the district expects continued modest enrollment growth going forward.

MIXED SOCIEOECONOMIC INDICATORS

The district's economy reflects a sizable manufacturing presence. Caterpillar, Inc. (IDR rated 'A'/Stable Outlook) is the largest employer with 2,300 staff. August 2015 unemployment for the city of Aurora was 5.3%, slightly below the state average of 5.6%. The city's employment levels increased modestly in August 2015 from August 2014. Income and wealth levels are on par with the state and nation.

Assessed valuation (AV) declined by 0.3% in 2014 but the district estimates AV will increase by 5% in 2015 due to increasing housing values.

DECLINING RESERVES DUE TO NON-RECURRING SHIFTS

The district has experienced some recent deficits due to non-recurring items related to an accounting adjustment and capital transfers.

In fiscal 2014 the general fund ended with a large reported deficit of $7.4 million (5.2% of spending) due largely to a change in the accrual period for property tax collections. In an effort to be more conservative, the district shortened its revenue accrual period. As a result, $2.9 million in property tax revenues received in July and August 2014 were reported in fiscal 2015 rather than fiscal 2014, lowering total reported collections for fiscal 2014. Consequently, the unrestricted fund balance dropped to 9.3% from 15.1% the prior year.

Fiscal 2015 ended with a general fund deficit of $4.4 million (2.8% of spending) due to a transfer to the district's operations and maintenance fund. In 2010, the district issued $12 million in general obligation limited tax bonds to increase the district's working cash fund (within the general fund) in order to finance capital projects. Of the total issuance, $5 million was transferred between fiscal years 2012 - 2014 with the remaining $6.8 million transferred in 2015. Fiscal 2015 marked the last year of these one-time transfers for capital. The transfer produced a planned decline in the unrestricted reserve to $9.2 million or 6.3% of operating expenditures in fiscal 2015. Absent this transfer, the district had an operating surplus of $2.7 million.

For fiscal 2016, the district has a balanced budget. Management is expecting actual results to be better than budgeted as its current estimates do not take into account additional money for staff salaries and benefits that the district expects to receive from the state. At a minimum, the district is expecting a $129,000 surplus.

In November 2015, the school board approved a tentative tax levy increase of nearly 5% which would result in $915,000 of additional operating fund revenue in fiscal 2016. The actual amount may be lower and will not be finalized until December. Fitch does not expect the increased funding to boost reserves.

MANAGEABLE LONG-TERM DEBT AND PENSIONS

The district's overall debt is manageable at $2,353 per capita and 4.5% of market value. Principal amortization is rapid at 93% in 10 years. Annual carrying costs (sum of debt service, pension, and other post-employment benefits but consisting mainly of debt service) are low at 10.3% of 2015 total governmental spending).

In April 2015, voters approved an $84.2 million referendum to fund capital improvements including energy efficient systems, classroom additions and a new elementary school. Of the approved debt, the district recently issued $4.8 million of Qualified Energy Conservation Bonds and plans to issue the remaining bonds over the next 18 months. Since the total authorization is nearly equivalent to the currently outstanding debt, the debt burden will increase notably.

The district's pension burden is less of a concern. It participates in the Illinois Municipal Retirement Fund (IMRF), an agent multiple employer system, as well as the Illinois Teachers' Retirement System (ITRS), a cost-sharing multiple employer system to which the state makes most payments on behalf of the district. The district covers the employees' portion of pension payments. For its IMRF obligation, reported fiduciary net assets cover 90% of the total pension liability. IMRF benefits and contributions are determined by the state, and state statute requires actuarial contributions. For ITRS, system-wide fiduciary net assets cover only 43% of total pension liabilities. The state is responsible for the vast majority of the district's ITRS liability, with the district carrying only a small portion of this liability.

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.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994441

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994441

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Rupali Mahida
Analyst
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
+1-212-908-9181
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rupali Mahida
Analyst
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
+1-212-908-9181
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com