News Column

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

August 26, 2014

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

--$3,385,000 million limited tax general obligation debt certificates, series 2010, at 'A-'.

The Rating Outlook is Stable.

SECURITY

The certificates are valid and legally binding direct obligations of the library payable from any funds of the library legally available for such purpose. The library agrees to appropriate funds annually and in a timely manner as to provide for the making of all payments due under the terms of the certificates. The library does not have taxing power.

KEY RATING DRIVERS

LIBRARY, CITY STRONGLY LINKED: The 'A-' rating reflects the library's exposure to the below-average credit fundamentals of the city of Waukegan. The library lacks independent taxing authority but the city has demonstrated its strong commitment to support the library's revenue base by continuing to increase the property tax levy dedicated to library operations.

RELIANCE UPON ONE-SHOTS: City general fund operations are reliant upon non-recurring sources for operating and liquidity support; however, the FY15 budget shows progress toward structural balance. Financial reporting has improved markedly after years of late audits.

CONTINUED ECONOMIC CHALLENGES: Assessed valuation continues to decline at a rapid pace. Further, the local economy is challenged by above-average unemployment rates and below-average wealth levels.

MODERATE DEBT; HIGH COSTS: The city's and the library's aggregate debt burden is moderate and future capital needs are manageable. The city's fixed cost burden for long-term liabilities is high at almost 30% in 2013, partially attributable to very rapid amortization.

POOR PENSION FUNDING: The city and library's pensions are underfunded, which will pressure future budgets. Pensions are being funded to the statutory minimum, below the actuarially-based annual required contribution (ARC).

RATING SENSITIVITIES

ECONOMIC STABILIZATION: The rating assumes continued economic challenges. Continued large declines in the tax base would likely put downward pressure on the rating.

FINANCIAL PERFORMANCE: The city and library's financial performance is critical to the rating. Inability of the city to demonstrate progress toward structural balance may cause downward rating pressure.

CREDIT SUMMARY

The library, coterminous with and a component unit of the city of Waukegan, is located in Lake County approximately 40 miles north of Chicago. The library's nine-member board is selected by the city's mayor and approved by the city council.

LIBRARY IS FINANCIALLY DEPENDENT ON CITY

The library is closely linked to the city's financial position and dependent on the city for levying its property taxes. Fitch considers as a credit positive the library's strong working relationship with the city, which consistently levies a substantially higher dedicated millage (.407 mills in 2015) than the .15 required by state statute. The library is highly dependent on property taxes; this source represents 89% of revenues in fiscal 2015 budget.

CITY CLOSER TO STRUCTURAL BALANCE

The city's finances remain structurally imbalanced, but have improved after years of financial challenges, with stronger budget-to-actual results, and on-time reporting for fiscal 2013. The city recorded break-even operations in FY13, although would have experienced a deficit absent a large transfer from the utility fund, sized to cover this shortfall.

Fiscal 2013 ending general fund balance was 26.6% of spending ($7.4 million). Preliminary projections suggest on-budget performance in 2014.

The city's home rule status confers considerable revenue flexibility, demonstrated by the instating of a food and beverage tax in 2011 and a 1/4-cent sales tax to be collected in 2015 for capital projects.

The 2015 budget eliminates the practice of ongoing utility support for general operations and failure to achieve this could be a credit concern. While the 2015 budget is balanced, Fitch notes that some outyear pressure may result from grant-funded public safety positions, grants for which terminate in 2016. Fitch expects that stepped up public safety pension costs in FY16 will be offset by increases in the city's dedicated pension levies.

LIBRARY RESERVES PARTIALLY MITIGATE EXPOSURE TO CITY

The library's strong relationship with the city and prudent fiscal policies resulted in a strong fiscal 2013 unreserved fund balance at 48.5% of spending ($2 million), helping to mitigate the library's exposure to the city. Library operations have been stable, with some use of fund balance for capital projects. Fitch expects that the library will use a portion of its strong fund balance for future capital improvements, but that reserves will remain solid.

The library's 2015 budget continues the trend of strong city support with 3% growth in the city's library levy and incorporates a small operating surplus. Cuts in hours have been partially restored. The budget includes $1.2 million in paygo-funded renovations. Continued expenditure monitoring will remain key to the library's financial flexibility given its revenue-raising constraints.

WEAK ECONOMIC INDICATORS; CONTINUED AV DECLINES

The city's unemployment rate was notably elevated at 9.6% in April 2014, well above state (7.2%) and national (5.9%) averages, reflecting continued challenges in the local economy. The city experienced aggregate tax base decline of 37.7% since peak (2009), and declines have persisted in recent years, dropping 14% for fiscal 2014 and 12% for fiscal 2015. Wealth indicators are below both state and national averages. The city's top employers represent health and higher education and manufacturing sectors.

MODERATE DEBT; POOR PENSION FUNDING

Fitch does not expect that debt payments will represent near- or medium-term financial pressure for the library, as overall debt is moderate ($2,075 per capita; 4.3% of market value) and future capital needs are modest and expected to be financed through private donations and accumulated reserves. The library's debt service expense in 2013 was a low 8% of expenditures.

Fitch expects that the city's and library's annual pension payments will likely increase given that the state plan to which they contribute is underfunded (estimated at 61% as of Dec. 31, 2012 based on Fitch's 7% rate-of-return assumption) and statutory contribution rates, which the library and city pay in full, are less than the actuarially determined rates. The city's 2013 fixed cost burden was an elevated 28%, and would have been still higher at 31% had the city funded its ARC. This elevated level reflects very rapid principal amortization, at 90% in 10 years.

Other post-employment benefits (OPEB) are limited to an implicit rate subsidy, which is not presented separately for the library from the city's financial reporting. The city's unfunded OPEB actuarially accrued liability is $54.2 million, representing a scant 0.1% of market value.

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, and Zillow.

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:

U.S. Local Government Tax-Supported Rating Criteria

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

Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=857874

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

Stephen Friday

Associate Director

+1-212-908-0384

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Karen Wagner

Director

+1-212-908-0230

or

Committee Chairperson

Arlene Bohner

Senior Director

+1-212-908-0554

or

Media Relations

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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