Fitch Affirms Waukegan Board of Library Trustees, IL's Debt Ctfs at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the rating on the following Waukegan Board of Library Trustees, Illinois (the library) debt at 'A-':

-- $3.1 million limited tax general obligation (GO) debt certificates, series 2010.

Additionally, Fitch affirms the following rating;

-- Issuer Default Rating (IDR) at 'A'.

The Rating Outlook is Stable.

SECURITY

The certificates are payable from any funds of the library legally available for such purpose subject to annual appropriation.

KEY RATING DRIVERS

The 'A' IDR on the library reflects the library's exposure to the credit fundamentals of the city of Waukegan given the library's status as component unit of the city. The library's budget is subject to city approval as are the issuance of debt and the levy of taxes on its behalf. The library's GO certificates are rated one notch below the IDR at 'A-' reflecting the slightly higher degree of optionality associated with the appropriation of debt service payments.

Economic Resource Base

Waukegan's economic profile is characterized by its comparatively low income and high poverty, slowly declining population, and labor and housing markets that perform well below regional and state standards and are subject to periods of high volatility.

Revenue Framework: 'a' factor assessment

The library's legal ability to increase revenues is assessed through the high revenue-raising capacity of the city as a home rule unit of government. Fitch believes that the city and the library's revenue growth will be slow, at or below inflation absent policy action, given population and employment trends and recent modest improvement in the tax base.

Expenditure Framework: 'bbb' factor assessment

Library expenditure flexibility is strong as service levels are easily adjustable due to a large number of part-time employees, no union contracts, and low carrying costs. However, the assessment is constrained by the city's limited expenditure flexibility marked by a high cost of servicing debt and retiree benefits and limited ability to make cuts given significant labor force reductions during the recession.

Long-Term Liability Burden: 'aa' factor assessment

Library debt is minimal. The long-term liability burden reflects the moderate debt and pension liabilities of the city which are estimated at 9% of personal income. Fitch believes this burden will likely be pressured going forward based on the city's declining demographic and economic trends but also the poor funded position and funding practices associated with city pension plans.

Operating Performance: 'aa' factor assessment

Fitch views the city and the library as having strong gap-closing capacity to manage through an economic downturn due to healthy available reserve balances and the independent ability to increase revenues. Budget management has generally been sound historically, although pension underfunding is viewed as a concern.

RATING SENSITIVITIES

City Link: The library IDR and GO certificate rating are sensitive to shifts in the city's general credit quality. Changes in management practices that materially weaken the city and the library's financial resilience could pressure the ratings.

CREDIT PROFILE

The library is coterminous with the city of Waukegan which serves as the Lake County county seat, located approximately 40 miles north of Chicago. The library is governed by a nine-member independent board of directors whose members are appointed by the city's mayor and approved by the city council.

The city's economic profile is somewhat weak. Unemployment rates are consistently above the state and national rates. Recent moderate positive momentum is expected to be somewhat stalled by the recent departure of a large city employer. The city experienced significant declines of 58% in equalized assessed valuation (AV) from 2009 through 2014. The values are beginning to recover in recent years with modest increases of 3% to 5% through 2017 but property values remain well below pre-recession peaks. City tax rates are high among neighboring municipalities following multiple years of tax rate increases during the recession.

Revenue Framework

City and library revenues principally consist of real property taxes and supplemented by grants and fees. Revenue growth has exceeded the U.S. GDP over the past 10 years through 2014 largely due to the decision of policymakers to increase the property tax rate. The city must levy 0.15 mills for the library under state statute but the 2015 rate was more than double that amount. Absent policy action, Fitch believes that the city's revenue growth will be slightly below inflation given recent modest improvement in the tax base and growth in sales tax collections.

Legal revenue-raising power is evidenced in the city's status as a home rule unit. The library has no authority to levy property tax directly and is reliant on the city's approval.

Expenditure Framework

The library is a single-purpose entity established to provide public library services for the city residents. While the costs demands of the library operation are modest, the majority of the city's expenditures are for public safety (70% of general fund revenue) and other essential city services. Fitch expects that the natural pace of spending growth for both the city and the library will be in line with revenues, although pension increases in the future could add pressure. The largest expenditure items for both entities are personnel costs with modest negotiated future salary increases in future years and good legal capacity to control headcount and workforce rules.

The city's carrying costs for debt service, pension and other post-employment benefits (OPEB) are a concern as they account for 31% of governmental expenditures in fiscal 2015. More than half of this metric is related to annual pension costs which have risen from $7.4 million in fiscal 2011 to $14.1 million in fiscal 2015. The city has increased its annual contribution in recent years which may offset future increases.

Long-Term Liability Burden

The library debt is minimal but the overall long-term liability for the city is moderate at approximately 9% of person income. The largest portion of the liability is overlapping debt with the other governmental entities, including the Waukegan Park District, Lake County Forest Preserve district and the local school district.

The library's employees are pooled with the city employees in the Illinois Municipal Retirement Fund (IMRF), an agent multiple employer pension plan. The library does not carry a long-term pension liability on its balance sheet. City employees are covered by three defined benefit pension plans, including the Illinois Municipal Retirement Fund (IMRF) which is a multiple employer plan, and the Police Pension and Firefighters Pension plans which are single employer plans. The city has consistently underfunded its actuarially required contribution, which has resulted in a low ratio of actuarial assets to accrued liability of approximately 55%. The underfunding of the pension funds will likely result in growth in the city's total net pension liability.

Operating Performance

Fitch believes that the both the city and the library have strong gap-closing capacity given that current reserve levels are sufficient to offset a short-term revenue loss in the event of a moderate economic downturn. The Fitch Analytical Sensitivity Tool suggests the library's revenues are sensitive to economic trends based on historical revenue collections. The city has consistently increased property tax rates to stabilize library operations during the prior recession. Given the city's modest revenue growth prospects, the city could be pressured to reduce the library's tax levy closer to the 0.15% minimum required rate. In the event of a reduction in the library's property tax levy, the library has the capacity to reduce services or minimize operating hours for operational savings. The city has less expenditure flexibility given the significant reductions in expenditures in prior years.

The library has maintained stable available general fund reserves over the past five years with no deferral in necessary spending. The library will continue to conform to its reserve target of maintaining available reserves of 25% of general fund expenditures. Given the library's reliance on the city it is important to note the city's financial resilience has improved in recent years. The general fund operations are no longer reliant on transfers from enterprise funds, which had been a concern in prior years. Available general fund reserves are well above 30% of general fund expenditures in fiscal 2014 and 2015.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014449

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014449

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Shannon McCue, +1-212-908-0593
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, New York
+1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Shannon McCue, +1-212-908-0593
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, New York
+1-212-908-0526
elizabeth.fogerty@fitchratings.com