News Column

Fitch Rates Chicago Park District, IL's GOs 'AA-'; Outlook Stable

May 30, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA-' rating to the following Chicago Park District, IL (the district) limited tax general obligation (LTGO) bonds:

--$41.275 million LTGO tax park bonds, series 2014A;

--$93.035 million LTGO refunding bonds, series 2014B;

--$46.93 million LTGO refunding bonds, series 2014C;

--$26.58 million LTGO refunding bonds, series 2014D.

The bonds are expected to sell via negotiated sale the week of June 2.

In addition, Fitch downgrades from 'AA' to 'AA-' the rating on the district's outstanding LTGO and unlimited tax general obligation (ULTGO) bonds.

The Rating Outlook is revised from Negative to Stable.

SECURITY

LTGO Bonds - General obligations of the district payable from ad valorem taxes levied without limitation as to rate but limited as to amount by provisions of the statewide Limitation Law on all taxable property within the boundaries of the district.

ULTGO Bonds - General obligations of the district, payable from ad valorem taxes, unlimited as to rate or amount.

KEY RATING DRIVERS

PENSION REFORM APPROVED: The Stable Outlook reflects the state's approval of a revised pension funding formula for the district that materially improves the district's pension outlook from the previously projected asset depletion date of 2023.

NEW PLAN NOT WITHOUT RISK: The downgrade largely reflects statutory rather than actuarial funding under the new plan. Though reforms should gradually reduce the unfunded liability, a sustained period of poor market returns would reverse funding progress given the limited ability to increase funding. The low funding level of the plan makes this risk even more acute.

LIMITED PURPOSE; STRONG FINANCES: The 'AA-' rating indicates high credit quality reflecting the district's limited purpose and inherent expenditure flexibility. The district maintains strong reserves supported by conservative fiscal management and budgeting.

DIVERSE AND STABLE SERVICE AREA: The city of Chicago, while showing signs of economic pressure as evidenced by above-average unemployment and declining equalized assessed valuations (EAV), is broad and diverse and is the economic hub of the state.

PRESSURED OVERLAPPING ENTITIES: The district's overlapping entities, particularly the City of Chicago, Chicago Public Schools and Cook County, all face notable financial challenges stemming from pension underfunding, which could pressure the district's tax base. Importantly, the district's proportional tax levy is a low 6%.

RATING SENSITIVITIES

CHANGES IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district was created in 1934 with a tax base coterminous with the city of Chicago (rated 'A-', Negative Outlook). It is one of the largest municipal park districts in the world, comprising 8,300 acres of green space in 585 parks, 231 field houses and 26 miles of lakefront property. Private cultural institutions that operate facilities on district property include the Museum of Science and Industry, Field Museum of Natural History, DuSable Museum of African American History, Adler Planetarium, John G. Shedd Aquarium, and the Art Institute of Chicago.

PENSIONS REFORM EXPECTED TO IMPROVE PLAN FUNDING

The district maintains a single-employer defined pension plan that is governed by state law. Pension costs are currently funded according to the minimum statutory requirement which is substantially below the ARC. Employees contribute a percentage of their salaries, and the district contributes a fixed multiplier of the employee contributions.

The statutory payment amount as of Dec. 31, 2012, represented 31% of the ARC, resulting in the pension system being 43.4% funded, or an estimated 41.1% funded using a 7% discount rate assumption. The statutory funding plan in place at the time showed the pension fund insolvent within 10 years, based on district projections. The difference between the district's actual statutory payment and the ARC for 2012 was approximately $23 million or 9% of spending.

In January 2014, the district received required state approval for a new funding formula to begin in 2015. Contribution rates for both the district and employees increases, the retirement age for the majority of district employees is raised, and the cost of living adjustment is lowered.

The plan calls for $12.5 million supplemental district contributions in 2015 and 2016 and a $50 million contribution in 2019. The first two contributions will be funded from reserves. Actuarial projections show that the plan should now reach 100% funding in 40 years.

Fitch believes the revised funding plan should put the pension plan in a materially better funding position than it was prior to the passing of legislation. However, the new plan faces two challenges. First, litigation challenging the new plan by a beneficiary who believes their benefits have been unlawfully impaired could delay or cancel implementation. Thus far, no suits have been filed.

Secondly, contributions continue to be calculated on a statutory, rather than an actuarial basis. With that, the plan will be challenged to recover from large investment losses as there is no method to adjust contribution levels. However, Fitch believes the increased contribution levels and other changes to the plan materially improve the plan's ability to withstand such a stress, compared to the prior funding plan.

OVERLAPPING ENTITIES ALSO FACE CHALLENGES

The district receives almost 60% of its general fund revenues from property taxes. The largest taxing bodies that overlap with the district, Cook County, the city and Chicago Public Schools, are all facing notable financial pressures, particularly regarding pensions.

Fitch believes it will be politically challenging for all of these issuers to simultaneously raise taxes to fully support operations, further pressuring the district. Additionally, though the district is independent of the city, its board is appointed by the city and Fitch is concerned that pressure could be exerted on the district to let the city's needs trump those of the district.

The district's property tax levy makes up only about 6% of the total tax bill for a Chicago resident. Property tax increases, under the Limitation Law, are restricted to the lesser of 5% or the percentage increase in the Consumer Price Index. The district did successfully increase its property tax rate for 2014.

RECURRING SURPLUSES IMPROVE FINANCIAL FLEXIBILITY

The district completed 2012 with its fourth consecutive operating surplus (after transfers), adding $10.3 million to its unrestricted fund balance of a robust $195 million or 76.9% of spending. The surplus was driven by increased permit fees and personnel savings. The district has been actively seeking ways to increase non-tax permit and other fees to further diversify its revenues. The district would not have been able to cover the statutory to ARC differential of $23 million, but Fitch believes the district could have come much closer had it set out to budget the ARC initially. Fitch views the district's budgeting practices as prudent.

Unaudited 2013 results show an operating deficit of approximately $9.9 million. The district likely would have had a small surplus if not for a short delay in the receipt of a portion of property tax revenues from the county. Favorable variances in revenues from events at Soldier Field and personnel expenses offset a negative variance in harbor fees. Despite the deficit, reserve levels remain strong at over $185 million, which includes $25 million that will be used for the $12.5 million annual payments to the pension fund in 2015 and 2016 under the revised plan.

The 2014 budget is balanced and the district reports no major variances to date. The district continues to implement new revenue enhancing initiatives and closely manage expenditures while continuing its core mission of increasing service offerings to residents.

The district has prudently identified sources to pay for elevated recurring pension costs beginning in 2015, including debt service savings, personal property replacement taxes and other revenues, and organizational efficiencies. Given the district's limited purpose, Fitch believes it has greater expenditure flexibility than most full-service governments. Specifically, the district's ability to delay or cut projects from its capital plan and reduce staffing, approximately half of which is part time, is inherently greater than other governmental entities.

ELEVATED BUT MANAGEABLE DEBT LEVELS

The district's debt position is manageable, with a mix of limited and unlimited tax GO debt, as well as alternative revenue-source bonds. Debt service has a relatively high claim on resources, accounting for 21% of 2012 expenditures, which is not unusual for capital intensive special districts.

The district's overall debt level is above average, reflective of substantial borrowing by overlapping jurisdictions. Debt amortization is average with 45% of debt retired in 10 years. The district's five-year capital plan anticipates approximately $35 million of additional bonded debt annually, which should be structured to fit within the existing levy and to allow for future borrowing.

The district has minimal other post-employment benefit (OPEB) costs for retired employees. Total carrying costs for pension, debt service and OPEB in 2012 were a moderate 20% of government fund expenditures. Assuming the district had paid its full pension ARC rather than the statutory payment, carrying costs increase to almost 24% of expenses. Importantly, and consistent with other limited purpose entities, debt service costs make up the majority of carrying costs. Debt service totaled 20% of fiscal 2012 spending, or 2.75x the pension ARC, which was 7% of spending. Fitch believes the district is relatively well positioned to adjust its budget to meet the incremental increase to reach the new statutory payment requirement.

CHICAGO SERVES AS ECONOMIC HUB

The service area remains a strong and diverse center of economic activity although the recession has resulted in some stress. Job losses in the financial services, construction, and manufacturing sectors are reflected in the city's above-average unemployment rate. For the month of March 2014, the city of Chicago recorded an unemployment rate of 9%, compared to 8.3% for the state and 6.8% for the U.S.

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, Zillow.com and, 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832377

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Eric Friedman, +1-212-908-9181

Director

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Arlene Bohner, +1-212-908-0554

Senior Director

or

Committee Chairperson

Jessalynn Moro, +1-212-908-0608

Managing Director

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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