RPT-Fitch affirms DeKalb County Community USD No. 428 (IL) 'AA-' lease certificates
(Repeat for additonal subscribers)
Dec 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the following Community Unit School District No. 428 of DeKalb County, Illinois (the district) ratings:
--$500,000 lease certificates, series 2001, qualified zone academy bonds (the certificates) 'AA-'.
The Rating Outlook is Stable.
The certificates are a general obligation of the district and payable from any lawfully available sources. The obligations under the certificates are general obligations of the district and are not subject to appropriation or abatement. The certificates are additionally secured by a state aid intercept mechanism.
KEY RATING DRIVERS
STRONG RESERVES: Reserves are expected to remain strong following a modest decline in fiscal 2013.
DECLINING TAX BASE: The district's tax base has declined over the past four years, requiring property tax rate increases to maintain budgetary balance. Tax base declines are expected to moderate in fiscal 2014 and Fitch believes the district's tax base will stabilize over the longer term based on current and planned development activity.
UNIVERSITY PRESENCE PROVIDES STABILITY: District economic indicators are mixed, likely due to the large student population. However, the district's economy is driven by and benefits from the presence of Northern Illinois University. WEAK DEBT PROFILE: The district's debt profile is weak, characterized by high direct and overall debt ratios and very slow amortization of direct debt, including an increasing debt service schedule. Further erosion in the tax base could worsen the already high debt ratios. Pension and other post-employment benefit costs (OPEB) are manageable.
STATE INTERCEPT MECHANISM: The certificates also benefit from a state intercept mechanism. However Fitch does not assign a rating to the intercept program. Therefore the rating is based on the district's credit characteristics.
CHANGES TO FUNDAMENTALS NOT EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics, including the district's continued ability to manage expenditures and maintain strong financial reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The district, which includes the City of DeKalb (the city), a small section of the City of Sycamore, and portions of unincorporated areas in six townships in DeKalb County serves about 6,000 students. The district covers about 108 square miles and is located approximately 60 miles west of Chicago.
The district has maintained strong financial reserves due in part to strong expenditure controls and conservative accurate budgeting, particularly for state funding. Fiscal 2012 ended with a strong unrestricted general fund balance of $20.7 million or 33% of budget. For fiscal 2013, the district is expected to realize a small deficit of $838,000 (unaudited). This figure is lower than budget expectations and largely due to increased Medicaid revenue. Fund balances are consistently above the districts' policy target of 25%. Overall liquidity is strong with no need for short term borrowing.
In fiscal 2011 the district' general fund included the combination of the former education and working cash funds. Financial reserves increased significantly in fiscal 2011 when the working cash fund benefited from a $10.5 million state construction grant. The district indicates that these funds can be used at the governing body's discretion and is included in the district's unrestricted general fund balance.
The district's strong reserves provide flexibility. Fitch views this as an important credit characteristic at this rating level given uncertainty surrounding state funding levels and flat to modestly increasing property tax revenue due to a declining tax base. The district's revenue raising capacity is constrained by district property tax limit which caps the annual increase in the district's property tax levy to the annual percentage increase in the consumer price index. However, because the levy can be extended based on the prior year levy level, the tax base declines would not result in declining tax revenues.
DECLINING TAX BASE
Following steady modest growth through fiscal 2010, the district's taxable assessed value (TAV) has suffered three consecutive annual declines totaling 18.6% though fiscal 2013. Another 8% decline is projected for fiscal 2014. The declines are largely due to drops in residential values and were delayed due to slow foreclosure activity. Modest current development activity within the district coupled with improving sales prices are expected to stabilize valuation.
The district indicates its current willingness to raise tax rates as permitted. However, Fitch notes that after rate increases of 21% since fiscal 2007 and 9% in tax year 2010 (primarily as a result of recent voter approved debt issuance) there may be pressure to constrain rate increases. The district's tax base shows minimal concentration as the top 10 taxpayers comprise 7.5% of TAV for fiscal 2012.
ECONOMY BENEFITS FROM UNIVERSITY PRESENCE
Local demographic indicators are mixed. The local economy benefits from and is driven by Northern Illinois University (NIU; approximately 24,000 students) with about 9,077 employees or over 15% of total current employment in the district. Other top employers include Kishwaukee Community Hospital (1,200 employees), the district (778), and 3M Company (572).
The city of DeKalb's annual average unemployment rate for the past three years has been below state levels but above the nation. The unemployment rate is somewhat skewed due to the large student population. Recent unemployment levels for August 2013 were 8.8% for the city and 9% for the state. District per capita income levels were low in 2011 at 74% of state levels and 80% of U.S. levels, partially because of the student population.
WEAK DEBT PROFILE; INCREASING CARRYING COSTS
The district's debt profile is weak primarily as a result of recent debt issuances in 2009 and 2010 totaling approximately $73 million. Overall debt (including overlapping debt) is moderate at $3,350 on a per capita basis in fiscal 2013 but overall debt levels are very high at 7.7% of market value. Direct debt payout is slow as only about 34% of principal is paid in ten years. The district does not currently have any additional debt issuance plans, has adequate capacity, updated facilities and expects to fund minor projects from budgeted funds. Overall carrying costs for debt, pensions and OPEB are moderate at 8.4% of total governmental spending. Fitch notes with some caution that future annual debt service (ADS) levels show fairly significant increases in the out-years, with ADS rising from $4.9 million in fiscal 2012 to $15.3 million in fiscal 2027.
LOW PENSION AND OPEB REQUIREMENTS; WEAK FUNDED RATIO FOR AME PLAN
The district's pension requirements are low, mostly as a result of certain state payments made on behalf of the district. The district maintains two pension plans. This includes a cost sharing multiple employer (CSME) plan for its teachers under the Teachers' Retirements System of the State (TRS) as well as an agent multiple employer (AME) plan for its other employees through the Illinois Municipal Retirement Fund (IMRF). Combined district annual required contribution (ARC) levels (excluding the state on-behalf payments to TRS) for both pension plans represent a low 2.9% of fiscal 2012 general fund spending.
The state makes most of the TRS payments on behalf of the district, which consistently makes all of its ARC to the TRS plan for the requirements not made by the state. However, , the district made slightly less than 100% of the IMRF ARC over the past three years, reflecting an emphasis on current operations. Fitch notes that the resulting $210,000 net pension obligation in fiscal 2012 is a relatively minor amount. That said, if the district does not return to fully funding its ARC, there could be downward rating pressure given the very low combined funded ratio of 59% for all plans using the Fitch adjusted 7% return assumption.
The district also provides OPEB benefits to its retirees and the district has made all of its required contributions to its OPEB plans. The combined district ARC for its two OPEB plans is low at $1.9 million.
STATE INTERCEPT MECHANISM
Apart from the district's general obligation pledge, the certificates also benefit from a state intercept mechanism. As part of this mechanism, specific payments from General State Aid (GSA) covering 125% of certificates principal are made by the state to the trustee 12 months prior to the October 2015 maturity of the certificates. The district received at least $7.9 million in GSA over the past three fiscal years. This would provide over 12x coverage of the 125% principal requirement; GSA is a foundation formula state grant. Fitch does not assign a rating to this state intercept mechanism. Therefore, the rating on these certificates is based on the credit characteristics of the district.
- Malaysia air probe finds scant evidence of attack: sources |
- Search widened as Malaysia air probe finds scant evidence of attack |
- Confrontation in Ukraine as diplomacy stalls |
- Exclusive: Chinese raw materials also found on U.S. B-1 bomber, F-16 jets
- Freescale loss in Malaysia tragedy leads to travel policy questions