News Column

Fitch Affirms Skokie, IL's GOs at 'AAA'; Outlook Negative

July 31, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the 'AAA' rating assigned to the following Skokie, IL (the village) bonds:

--$60 million general obligation (GO) bonds.

The Rating Outlook remains Negative.

SECURITY

The bonds are a general obligation of the village backed by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

NEGATIVE OUTLOOK DRIVERS: Fitch views financial flexibility as still strong, but the village's fund balance levels have dropped to levels well below policy targets, while pension costs are expected to increase to improve plan funded levels.

AFFLUENT CHICAGO SUBURB: Proximity to Chicago and an expanding transportation network attracts a professional work force with above-average wealth levels.

MULTIPLE REVENUE SOURCES: Skokie benefits from its home rule charter affording it a diverse revenue stream. The village recently exercised its revenue-raising flexibility by increasing several tax rates.

SALES TAX REVENUE STRENGTH: Sales tax revenues, the village's largest source of funding, recovered well from a recession-led decline. This revenue source is anchored by several prominent shopping malls which attract consumers from throughout Chicago's northern suburbs.

RATING SENSITIVITIES

FUND BALANCE AND PENSION FUNDING: Failure to bring fund balance levels materially closer to policy levels while continuing to make increasing statutorily-required pension payments, will result in downward rating pressure.

CREDIT PROFILE

Skokie is located in Cook County, 16 miles northwest of downtown Chicago. Its population of 64,784 is up a modest 2.3% from 2000. A number of residents commute into Chicago and other nearby suburbs. Wealth levels continue to be solid with the median household income at 118% of the state level and 126% of the national average.

ECONOMY ANCHORED BY SUCCESSFUL MALL

The village has a diverse economic base led by three large shopping centers, including the Old Orchard Shopping Center, and various commercial and industrial areas. Management reports that the Old Orchard Shopping Center is fully occupied. NorthShore University Health System is the village's largest employer (2,410) followed by vehicular and manufacturing parts supplier FederalMogul (1,500).

A new train station opened in 2012 and has enhanced commuters' access to Skokie's downtown and its Illinois Science and Technology Park (ISTP), helping to promote redevelopment and business relocation. The village is also expecting to benefit from the opening of a Super Wal-Mart in August, 2014. These developments should help reverse recent declines in assessed value and also enhance sales tax revenues. 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.

DIVERSE REVENUE SOURCES LED BY SALES TAX

The village has substantial ability to raise revenue from diverse sources and as a result has maintained a property tax levy freeze since 1991. Its primary revenue source is sales taxes, comprising 38% of general fund revenues. After a notable decline in fiscal 2009 (year ended April 30), sales tax revenues were up a cumulative 15% from 2010 to 2013, and revenues grew an additional 1.5% in fiscal 2014. The village recently increased its home rule sales tax from 1% to 1.25% effective Jan. 1, 2015, which should generate $2-3 million in additional revenue annually.

Management implemented a utility tax in fiscal 2011 that yielded $4 million to the general fund in fiscal 2013 that was primarily used to offset increased pension costs. The village also approved an upcoming increase to its hotel/motel tax that will benefit the general fund beginning in mid-fiscal 2015. As a home rule municipality, the village still has very good revenue raising capacity and there are several taxes that Skokie does not utilize that most neighboring communities do.

RESERVES REMAIN BELOW PAST LEVELS AND POLICY TARGETS

General fund balances declined for several years despite considerable revenue flexibility and active expense management that included a hiring freeze since late 2008. However, in fiscal 2012 the village had an operating surplus (after transfers) of $725,000 (1.4% of expenditures). Fiscal 2013 showed another modest surplus of $464,000 (0.9% of expenditures), increasing unrestricted fund balance to $8.7 million or 16.6% of expenditures. The village is projecting little change to fund balance for fiscal 2014. Based on early trends in tax receipts, the opening of the Super Wal-Mart and the tax rate changes, the village projects a larger surplus for fiscal 2015.

For close to two decades the village had maintained an unreserved/unrestricted fund balance in the range of 25%-40% of spending. Fitch viewed this trend as an important factor in the village's exemplary 'AAA' rating, particularly given its reliance on economically sensitive sales tax revenue. Maintaining this rating depends on the village's ability to continue to meaningfully increase its fund balance towards its goal of 25% while continuing to fund its pension plans at statutorily required levels.

MODERATE CARRYING COSTS; UNDERFUNDED PENSIONS

Skokie's overall debt level is at the high end of the moderate range at 4.9% of full value and $4,693 per capita. Direct debt amortizes rapidly, with 77% maturing in 10 years. The village has no additional debt planned.

The village manages pension plans for fire and police and participates in the state's municipal retirement plan. Using Fitch's assumed 7% rate of return, the fire plan is funded at a weak estimated 54% while the police and state plans are estimated at a stronger 66% and 78%, respectively. Contributions to the police and fire plans are at actuarially calculated levels to improve funding to 90% by 2041, per state statute. The village's implicit rate subsidy for other post-employment benefits (OPEB) results in a low unfunded actuarial liability of $6.7 million as of April 30, 2013. Carrying costs for debt service, pensions and OPEB are moderate at 20% of governmental fund expenditures.

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, National Association of Realtors.

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

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=843274

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 Street

New York, NY 10004

or

Secondary Analyst

Arlene Bohner, +1 212-908-0554

Senior Director

or

Committee Chairperson

Amy Laskey, +1 212-908-0568

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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