Fitch Downgrades DuPage County's (IL) IDR and GOs to 'AA+' on Criteria Change; Outlook Stable

NEW YORK--()--Fitch Ratings has downgraded the following DuPage County, IL underlying ratings based on review of the credit under Fitch's revised criteria for U.S. state and local governments:

--Issuer Default Rating (IDR) to 'AA+' from 'AAA';

--$111.8 million unlimited tax general obligation (ULTGO) bonds to 'AA+' from 'AAA';

--$36.1 million limited tax general obligation (LTGO) bonds to 'AA+' from 'AAA'.

The Rating Outlook is Stable.

SECURITY

The ULTGO bonds are backed by the county's full faith and credit and its ad valorem taxing power, without limitation as to rate or amount.

The LTGO bonds are secured by an ad valorem tax, subject to limitation as to amount.

KEY RATING DRIVERS

The downgrade reflects implementation of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. Underlying credit factors since the time of Fitch's last review of the district are mostly stable; however, the revised criteria place increased focus on Fitch's expectations for the natural pace of revenue growth without revenue-raising measures and the ability of an entity to independently increase revenue. The downgrade reflects Fitch's concern that the county's limited revenue flexibility and slow revenue growth prospects.

The 'AA+' rating continues to reflect the county's low long-term liability position and strong expenditure framework, as well as Fitch's assessment that the county is very well positioned to addressed cyclical downturns while maintaining a high level of fundamental financial flexibility.

Economic Resource Base

The county's deep and diverse local economy is characterized by low unemployment and high wealth levels and benefits from its close proximity to Chicago. Comprising 332 square miles in northeastern Illinois with a population of about 934,000, the county is located 20 miles west of downtown Chicago. The population has remained fairly steady, increasing slightly since 2010.

Revenue Framework: 'bbb' factor assessment

Fitch expects the county's revenue to grow slowly, at a pace in line with inflation. The county has limited independent legal ability to raise revenue.

Expenditure Framework: 'aa' factor assessment

The county's expenditure growth should grow at a rate generally in line with revenue growth. Flexibility is supported by moderate costs for servicing debt and other long-term liabilities.

Long-Term Liability Burden: 'aaa' factor assessment

DuPage's long-term liability burden including pension liabilities and overall debt is low relative to personal income.

Operating Performance: 'aaa' factor assessment

The county has exceptionally strong gap closing capacity to manage through an economic downturn and has maintained reserve levels through the current economic recovery.

RATING SENSITIVITIES

Reserve Maintenance: The 'AA+' rating is sensitive to the maintenance of financial flexibility throughout the economic cycle, including a substantial reserve position.

CREDIT PROFILE

The county is in the Chicago metropolitan area and has a stable employment base consisting of a diverse mix of transportation, health care, schools, and a growing research and development sector including government research facilities. The county is favorably located at the western border of O'Hare Airport, a national hub of passenger, air freight and truck transit. Abundant transportation assets have attracted a variety of industries and employment opportunities which have positioned the county as a desirable place to live and work.

The county unemployment rates have historically been below state and U.S. averages. Assessed value (AV) had declined 19% from 2010 through 2014; however, the 2015 increase was 4.8% and the 2016 increase was 6.4%, reversing the negative trend. The property tax base is diverse, with the top 10 property taxpayers accounting for about 2% of total assessed valuation. The county is projecting future growth from an ongoing multi-million dollar construction project to make O'Hare Airport more accessible from DuPage County and other areas west of the airport. The project, referred to as Western Access, is expected to be completed in 2025 and county management is projecting the project will create 13,000 construction jobs and 65,000 permanent jobs.

Revenue Framework

The county is largely reliant on an economically sensitive sales tax, which comprises approximately 54% of fiscal year (FY) 2015 general fund revenue. The property tax accounts for 13% of revenue and a variety of other taxes and fees make up the bulk of the remainder.

Fitch expects that the county's general fund revenue will grow slightly below historical trends (2.5% 10 year compound annual growth rate) going forward, but generally in line with national inflation, due to a projected slowing of sales tax revenue and increasing AV. While sales tax revenue has grown between 4% and 5% annually over the past several years, it has slowed to only 1% growth in FY 2016, leading the county to change its growth assumptions going forward to only 2% growth.

Fitch views the county's independent legal ability to raise revenues to be limited. The county is a non-home rule unit of government and is subject to the Tax Extension Limitation Law, which limits the amount of annual increases in property taxes to the lesser of 5% or the percentage increase in the Consumer Price Index during the preceding calendar year. Voters in the county or the state legislature must approve any increases in the sales or other tax rates.

Expenditure Framework

The county has three main general fund expenditure items, spending approximately 36% on public safety, 28% on judicial operations, and 28% on general government.

Fitch expects that the natural pace of expenditure growth will be generally in line with revenue growth. The county's growth in expenditures is largely driven by labor force salary increases, which are assumed to grow at approximately 2% annually, in line with the level of inflation that is assumed for revenue growth increases.

The county's flexibility with its main expenditure items is solid, with carrying costs making up approximately 14% of governmental expenditures. The county also has flexibility in its budget to cut or delay spending on pay-as-you-go capital spending of $4.6 million (2.6% of FY 2015 general fund expenditures) and has a $1 million contingency built into its general fund budget. In 2007, during the last economic downturn, the county committed to lay off 7% of its workforce before the state General Assembly passed legislation containing a new 25-cent sales tax that would go to the county allowing it to rescind those staffing cuts. This demonstrates the county's willingness to use its expenditure flexibility to balance the budget in times of economic stress.

Long-Term Liability Burden

The county's long-term liabilities are low with the combined net pension liability and overall debt as a percentage of personal income at under 6%. Fitch expects the burden will remain low. The long-term liability metric reflects the county's participation in the multi-employer Illinois Municipal Retirement Fund (IMRF). The plan statutorily requires the county to contribute the actuarially determined rate. Fitch estimates the ratio of the fiduciary net position to total pension liability to be 84% assuming a 7% discount rate. Of the long-term liability burden, around 7% is direct debt of the county and 6% is the net pension liability. Approximately 87% is derived from overlapping debt, largely from various cities and villages within the county. The county has very little direct debt, as it historically has funded capital improvement needs on a pay-go basis.

Operating Performance

The county has maintained a high level of available fund balance throughout the recession and subsequent recovery relative to potential revenue declines depicted by the Fitch Analytical Sensitivity Tool (FAST) in a moderate economic downturn. This takes into account the relatively high level of volatility of the county's revenue stream, which relies largely on sales tax revenues. Fitch expects that the county's available reserve levels as a percentage of general fund expenditures (which have remained at above 32% since FY 2009) will remain above the 'aaa' reserve safety margin level throughout the economic cycle given the county board's commitment to use expenditure reductions, if needed, to balance the budget.

The county has made consistent efforts to maintain a high level of available reserves in the recent economic recovery in recognition of the relatively high volatility in its sales tax revenue stream. Current available reserve levels are above the county's policy of maintaining at least 25% of expenditures plus transfers of the next year's general fund budget. Management expects FY 2016 operations to be balanced despite revenue projections to decrease by $2.6 million year-over-year. To balance the budget, the county is actively reducing its cushion in certain expenditure lines. The county will budget for a slight increase in revenue in FY 2017, keeping expenditures approximately the same as the current FY 2016 estimated final.

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

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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Contacts

Fitch Ratings
Primary Analyst
Matthew Wong, +1-212-908-0500
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shannon McCue, +1-212-908-0593
Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Wong, +1-212-908-0500
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shannon McCue, +1-212-908-0593
Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com