NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following City of Evanston, Illinois (the city) unlimited tax general obligation (ULTGO) bonds:
--$12,585,000 general obligation corporate purpose bonds, series 2014.
The bonds are scheduled for competitive sale on Aug. 6, 2014. Proceeds will be used to fund various capital improvements in the city.
In addition, Fitch affirms the following ratings:
--Approximately $114.7 million in outstanding GO bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by the city's full faith and credit and its ad valorem tax without limitation as to rate or amount.
KEY RATING DRIVERS
AFFLUENT CHICAGO SUBURB: Residents display a superior socioeconomic profile as evidenced by high wealth, employment and education levels. Proximity to Chicago and Evanston's diverse economy provides abundant employment opportunities.
HEALTHY RESERVES; FINANCIAL FLEXIBILITY: The city maintains sound reserves despite planned drawdowns on fund balance. Positively, the city's home rule status provides significant financial flexibility.
PENSION CHALLENGES: Despite management's efforts to reduce the sizeable unfunded liability in the city's police and fire plans through periodic supplemental contributions, both systems are severely underfunded.
MANAGEABLE DEBT LEVEL: The aggregate debt burden appears manageable and future capital needs are reasonable. Carrying costs for debt service and other long-term liabilities are moderate.
PENSION LIABILITY: The city's continuing efforts to address its large pension liability and fully fund at or above its required pension contributions are key to rating stability.
INABILITY TO MAINTAIN SOLID RESERVES: The city's ability to maintain reserves at healthy levels and on par with city's policy is key to the current rating category.
The city is contiguous with Chicago and is approximately 13 miles from downtown. Evanston is a home rule municipality under Illinois statute, and as such it has no tax rate or debt limits, nor is it required to conduct a referendum to authorize the increase of debt or the imposition of property taxes. The 2013 estimated population of 75,570 has remained fairly steady, increasing by 1.5% since 2010.
PRIME LOCATION SUPPORTED BY EXCELLENT SOCIOECONOMIC FUNDAMENTALS
In addition to abundant employment opportunities throughout the Chicago metropolitan area, the city's local economy is strong, anchored by Northwestern University, which employs about 5,000 people and educates approximately 10,000 students at its Evanston campus. Additionally, Northshore University Healthcare and St. Francis Hospital with approximately 3,727 and 1,272 employees, respectively, provide stability.
Despite being negatively skewed by the student population (about 10%), per capita and median household income, as well as market value per capita levels are well above state and national averages. Residents are highly educated with 65% of the population attaining at least a bachelor's degree versus 28% nationally. The city's unemployment rate has historically been below those of the state and U.S. For May 2014, the city reported an unemployment rate of 5.8% compared to 7.2% and 6.1% for the state and U.S., respectively.
The city's tax base is primarily residential with Northwestern and the hospitals representing a sizeable amount of tax exempt value. The city's assessed value continues to experience sizable reductions - 12% in 2013. The reduction in assessed valuation is county-wide and should stabilize next year as the county is in the third and last year of a triennial reappraisal.
HEALTHY RESERVE LEVELS
The city's revenue base is diverse with various taxes comprising approximately 44% of total general fund revenues. Property, utility and sales taxes represent approximately 20%, 10.5% and 8.8% of general fund revenues, respectively.
For the year-end Dec. 31, 2013, the city recorded a small $670,000 (0.76% of spending) general fund operating deficit after transfers. The deficit was primarily a result of planned drawdowns to fund pay-go capital projects. The unrestricted general fund balance totaled $16.4 million or a healthy 18.6% of spending. Fitch views positively the city council's recent approval to change its fund balance policy to a minimum of 16.6% (two months operating expenses) from 8.3% (1 month operating expenses).
The 2014 adopted budget calls for general fund expenditures of $87.5 million, a 3.5% increase from the 2013 budget. There is no general fund property tax increase and the budget includes a modest increase in compensation and the addition of 15.3 full-time equivalent positions. At year-end the general fund is budgeted to have a small surplus of $170,225. To date management reports results are slightly ahead of budget.
SIGNIFICANT UNFUNDED PENSION LIABILITY
The city provides pension benefits to its public safety employees through two single employer plans and a state-sponsored plan for most other employees. As of Jan. 1, 2013, both the city's police and fire pension plans remain severely underfunded at 47% and 46%, respectively, using a 6.75% discount rate. As of Jan. 1, 2013, the state plan, the Illinois Municipal Retirement Fund, was better-funded at 85.5% or an estimated 78.8% using Fitch's 7% discount rate assumption. The aggregate unfunded actuarial accrued liability for all three plans totaled $173.4 million or a sizable 2.6% of full market value.
Management has been pro-active in addressing its pension liability. Although the police and fire plans are single employer plans, benefits and employee and employer contribution rates are established by state statutes. The city has consistently exceeded the minimum employer contribution amounts and recently has exceeded the actuarially required contribution (ARC). In fiscal 2009 the city made a $4.5 million supplemental pension payment. More recently, in 2013 the city funded the police and fire pension plans at a level that was $3.6 million above the minimum funding required by State statute. The city also reduced the interest rate assumption from 7% to 6.75% and is considering a further reduction to 6.5%. The city uses an unlimited levy to finance payments to the police and fire pension plans. This levy has increased to fund the higher pension contributions while the city's control of general fund costs has mitigated the overall levy increases.
While management continues to address the pension liability through more conservative actuarial assumptions resulting in higher contributions, this liability will continue to pressure budgetary operations. Fitch believes tangible long-term results from the city's active management of its pension liability is key to rating stability.
MANAGEABLE DEBT POSITION
Aggregate debt ratios are manageable at $4,229 per capita and 4.79% of full market value especially given the city's relative affluence. Maximum annual debt service (MADS) as a percentage of general fund spending is extremely high at 23%. However, approximately 27% of the direct debt obligation is self-supporting from various sources including tax increment revenues, special assessments, and utility fees and charges. Fitch expects the city's debt burden to remain manageable given rapid debt amortization (75% retired in 10 years) and moderate future borrowing.
Exposure to other post-employment benefits (OPEB) is limited as it consists of an implicit rate subsidy for retirees. The city's carrying costs inclusive of debt service, pensions and OPEB costs was a moderate 19.6% of government fund spending for 2013.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from CreditScope, CoreLogicCase-Shiller Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria,' dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria