Fitch Downgrades Village of Wheeling, IL's GOs to 'AA+'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades the following village of Wheeling, IL (the village) bonds to 'AA+' from 'AAA':
--$7.43 million general obligation refunding bonds, series 2011;
--$3.81 million general obligation sales tax refunding bonds, series 2012A;
--$3.38 million general obligation water system refunding bonds, series 2012B.
The Rating Outlook is Stable.
Fitch Ratings has withdrawn the 'AAA' rating on Wheeling's (IL) general obligation village hall refunding bonds series 2012C as the bond was not sold.
The GO bonds and GO water system bonds are secured by a pledge of ad valorem taxes levied against all taxable property within the village without limitation as to rate or amount.
The GO sales tax bonds are additionally payable from sales tax distributions to the village from the state.
KEY RATING DRIVERS
DOWNGRADE FACTORS: The downgrade reflects continued declines in assessed valuation and the reduced, but still substantial level of financial reserves.
STABLE ECONOMIC PROFILE: Village residents benefit from proximity to employment opportunities in Chicago as well as in its own modest business and industrial sectors. Unemployment remains below the state and nation.
MODERATE DEBT BURDEN: Wheeling's debt profile benefits from moderate debt ratios and minimal future debt plans, supported by significant pay-go funding of capital. Carrying costs for debt, pension and other post-employment benefits (OPEB) comprise a moderate part of the village's budget. A high portion of the debt is synthetically fixed and therefore subject to risks associated with liquidity and swap agreements.
DECLINING RESERVE LEVELS: The 'AA+' rating reflects the village's ample reserve levels. Significant further declines in fund balance could trigger a downgrade.
TAX BASE EROSION: Equalized assessed valuation (EAV) declined a cumulative 27% over the last 5 years. Further material declines in EAV could exert negative pressure on the rating.
The village of Wheeling is favorably located approximately 25 miles northwest of downtown Chicago. The village benefits from good highway access and is home to a commuter rail station which links residents to Chicago. The village's 2010 Census population of 37,648 increased a solid 9.1% from the previous decade.
SOLID ECONOMIC PROFILE; TAXBASE DECLINES
Wheeling residents benefit from proximity to employment opportunities in Chicago, augmented by commercial, manufacturing and trade sectors within the village. Wheeling's unemployment rate of 6.3% in November 2013 compares favorably to state and national rates of 8.3% and 7.0%, respectively. Employment and labor levels have been relatively flat. Wealth levels are mixed, but generally compare favorably to state and national averages, with per capita income at 93.6% of the state and 98.5% of the national levels. The poverty rate of 10.5% is below the state and national levels of 13.1% and 14.3% respectively.
Taxbase declines persist in the village, with 2013 marking the fourth consecutive year. EAV fell 8.4% in tax year 2012 (fiscal year 2013) and is expected to decline an additional 10% in tax year 2013 (fiscal year 2014), a triennial reassessment year. The village's home rule status affords it significant revenue raising flexibility, exempting it from the state-wide levy limitation and providing opportunity to access a variety of taxes and fees, if required.
Some economic development in the village continues, with a number of small commercial and industrial projects currently under development. The village has a fairly diverse tax base with top ten taxpayers comprising about 11.5% of total assessed value (AV).
SOLID FINANCIAL PROFILE
Wheeling's finances are marked by good revenue diversity, a history of high fund balances, conservative budgeting, and multi-year planning. The village recorded net operating deficits in the general fund for four of the past five years, although some of these are attributable to one time transfers for pay-go capital.
The $1.8 million deficit in 2012 was nearly twice what was originally budgeted and was largely due to transfer out of the general fund to repay approximately $1.5 million borrowed from the capital equipment replacement fund, the internal service fund and the capital projects fund in 2011. Without these transfers, the deficit would have been $300,000, less than originally budgeted. The unrestricted portion of 2012 ending general fund balance was $12.7 million or 38.5% of spending, a significant decline from the 51.8% recorded in 2011. Property taxes are the largest general fund revenue source, representing 32.8% of revenues in 2012. Sales taxes are the second largest source of general fund revenue, at 27.3% of 2012 revenues.
Preliminary results for 2013 indicate the village ended with a small surplus rather than the draw that was budgeted. Fitch believes this projection to be reasonable, given year-end estimates provided by the village. Ending general fund balance is expected to be $14.4 million, or 45% of operating expenditures, of which 41% is expected to be unrestricted. These positive results were driven by an increase in the property tax levy and year-over-year increases in sales and income taxes of 10.4% and 9%, respectively.
The village's 2014 budget includes a $1.1 million deficit, consistent with prior years. Revenues are conservatively budgeted and include 4% growth in sales taxes, while expenditures are expected to increase 5.5% largely driven by personnel costs associated with labor contracts.
The village recently settled a three-year labor agreement with the fire union that includes salary increases of 2.5% for the first two years and 2.75% in the third year, offset by health care insurance concessions. The village recently begun negotiations with the police union. Fitch believes the terms of the contracts will result in manageable spending increases for the village.
MODERATE DEBT AND SLIGHTLY UNDERFUNDED PENSIONS
The village's overall debt burden is moderate at 4.6% of market value, or $3,993 per capita. Amortization is average at 53% in ten years. The village has two outstanding series of synthetically fixed-rate bonds representing a high 44% of outstanding general obligation debt. Fitch expects debt to remain moderate as the village does not contemplate any further borrowing at present.
The village participates in two single-employer pension plans and the Illinois Municipal Retirement Fund (IMRF), the state's defined benefit agent multiple-employer retirement system. The village continues to fully fund the actuarially determined annual pension contribution for all three plans. The police, fire, and IMRF pension plans are each significantly underfunded at 69%, 59% and 74% or an even weaker estimated 65%, 56%, and 70%, respectively using Fitch's more conservative 7% discount rate versus 7.5% assumed by the plan. The village pays the annual required contribution for other post-employment benefits (OPEB), but has not established a trust. Carrying costs are moderate with debt service, pension ARC, and OPEB expenses representing 21.7% of governmental expenditures, although these may increase as the village increases pension funding to meet its target of being 100% funded by 2040.
Additional information is available at 'www.fitchratings.com'.
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, and Financial Advisor.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria