NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following Addison Village, IL bonds:
--$5.475 million general obligation bonds, series 2017.
The Rating Outlook is Stable.
Proceeds of the bonds will be used to finance the construction of an emergency services dispatch center and to provide funds for other capital projects. The bonds are scheduled to sell via competition on Dec. 5.
SECURITY
The bonds are backed by the village's full faith and credit and its ad valorem tax pledge, without limitation as to rate or amount.
KEY RATING DRIVERS
The 'AA+' rating is supported by Addison's strong growth prospects and its status as a home-rule municipality, which provides unlimited independent legal ability to raise taxes. The rating is also supported by the village's exceptional financial resilience, as well as its moderate long-term liabilities and solid expenditure control.
Economic Resource Base
Addison is located 14 miles southwest of O'Hare Airport and 25 miles west of Chicago, proximate to several interstates. The 2016 population is reported at 37,261. The village's property tax base is diverse and composed of approximately 60% residential property, 30% industrial property and 10% commercial property.
Revenue Framework: 'aaa' factor assessment
The village has strong growth prospects for revenues and has an unlimited legal capacity to independently raise revenues.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth is likely to be in line with to marginally above expected revenue growth. Carrying costs are moderate and the village maintains solid expenditure flexibility.
Long-Term Liability Burden: 'aa' factor assessment
The long-term liability burden is moderate.
Operating Performance: 'aaa' factor assessment
The village has limited exposure to economic cyclicality and exceptionally strong gap-closing ability in the form of revenue and spending control and the maintenance of high reserves.
RATING SENSITIVITIES
Expenditure Management: The rating is sensitive to increases in Fitch's expectations for the village's expenditure burden, including pension contributions and overall carrying costs.
CREDIT PROFILE
The village benefits from its location in the greater Chicago area, near O'Hare Airport, as reflected by significant industrial activity benefiting economic activity and revenue performance. The village is also home to DeVry University and Chamberlain College of Nursing.
The village's two largest employers are a United Parcel Service distribution center and the headquarters of Pampered Chef.
Revenue Framework
Sales taxes compose 37% of general fund revenues, followed by property taxes (22%) and the local portion of state income taxes (13%).
Growth prospects for revenues are strong. The historical 10-year compound annual growth rate (CAGR) from 2004-2014 was above the rate of U.S. economic performance and the rate of inflation. Strong historical revenue growth is partially attributable to local policy action and would naturally be lower in the absence of active tax-rate management. Nevertheless, the outlook for revenue growth remains strong due to economic growth and gains in equalized assessed value (EAV). Management expects new construction to also increase and estimates that total ad valorem tax revenues will increase 2%-3% in 2017.
Sales tax revenues increased 15% in fiscal 2016 over the prior year, which is artificially inflated by a one-time state audit adjustment. Sales tax growth, less the state audit adjustment, was 3.5% over the prior year. Management conservatively projects revenue to increase modestly in 2017. Revenue gains are driven by new retailers coming to the area. State income tax revenues are expected to remain stable in fiscal 2017. Fitch believes property, sales, and income tax expectations are reasonable given positive regional economic growth.
The village's independent legal ability to raise revenues is extremely broad. Illinois home-rule law exempts municipalities with a population in excess of 25,000 or by county-wide vote from the statewide property-tax levy cap. Under home rule law the village is exempt from property tax levy limitations and is permitted to offset declines in assessed values (AV) by raising the levy without limit. Home-rule status also provides Addison with the ability to impose a variety of taxes and fees that are unavailable to non-home-rule municipalities in Illinois.
Expenditure Framework
Public safety is the village's primary expense category, comprising approximately 60% of general fund expenditures. Addison also prioritizes spending for community development purposes and routine capital maintenance, equal to about 25% of expenditures.
Fitch expects that the natural pace of spending will be in line with to marginally above natural revenue growth, given expectations for the village's revenue stream and the nature of its spending obligations. The pace of spending has been modestly above the pace of revenue growth in five of the past seven years. This is primarily attributable to the early payment of healthcare benefits to employees participating in early-retirement incentive programs, which will help reduce future costs, and planned capital expenditures.
Carrying costs for pension, other post-employment benefits, and debt service as a percent of government spending are moderate at 18% of governmental expenditures. Pension required contributions comprise about half of carrying costs. Fitch believes that management is well-positioned to manage its expenses and have demonstrated a willingness and ability to find personnel-related cost savings.
Such measures include the implementation of a voluntary separation plan in 2008, which decreased staff participation without layoff or termination. The village has also successfully administered COLA and wage freezes and decreases in overtime, as well as the elimination of non-essential hiring during times of economic decline. Fitch believes that management is committed to utilizing these tools if faced with future financial pressures.
Long-Term Liability Burden
Addison's long-term liability burden is moderate with the net overall debt and unfunded pension liability burden totaling about 10% of per capita personal income. Direct debt comprises just 19% of the liability, with approximately 63% of debt service rolling off within 10 years. The village recently issued approximately $12 million in new debt spread over three issues, the last of which is the series 2017 offering. Bond proceeds will be used for the construction of a new dispatch center, water main repairs, and other capital. While the new debt may cause the net overall burden to increase, Fitch expects the long-term liability burden to remain moderate.
The village participates in two defined benefit pension plans -- the Illinois Municipal Retirement Fund (IMRF), an agent multiple-employer plan, and the Police Pension Employees Retirement System (PPERS), a single-employer pension plan. Management routinely funds the full actuarially required contribution (ARC) of the IMRF and has over-funded the PPERS ARC in the past two years. The state has mandated that PPERS meet a 90% funding requirement by 2046, effective fiscal 2016. This requirement could cause PPERS ARC payments to increase in the coming years. The combined plans reported an assets-to-liabilities ratio of 66.5%, assuming a 7% rate of return, as of Dec. 31, 2015.
Operating Performance
The village has an exceptionally strong gap-closing ability that leaves it well positioned to confront times of economic downturn. For example, during the Great Recession, management was able to use home-rule taxing authority as well as expenditure controls to maintain unrestricted fund balance levels well above their 25% policy level. Increases to sales taxes, accompanied by labor concessions such as wage and COLA freezes, and decreases in overtime expenditure, allowed the village to maintain significant financial flexibility. The strict budget management resulted in very modest draws on the village's ample reserves. Fitch believes that management would continue to follow these practices when faced with another moderate economic downturn.
Fitch considers budget management at times of economic recovery to be strong despite modest general fund operating deficits in four of the seven most recent fiscal years. Planned declines in fund balance have been due to one-time capital expenditures as well as the payout of early-retirement benefits, which will curtail future expenditures.
In addition to general fund balance, which equaled 35.5% of spending at fiscal 2016 year-end, the debt service and public buildings funds contain unrestricted monies that are available for general fund use, totaling approximately 2% of general fund expenditures. Total unrestricted reserves are well above the 'aaa' assessment level, given the moderate economic sensitivity of revenues and superior inherent budget flexibility.
Date of Relevant Rating Committee: Sept. 6, 2016
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the 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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015422
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