Jan 3 - Fitch Ratings affirms the following rating on Lake Zurich Community Unit School District (CUSD) No. 95, IL’s (the district) general obligation (GO) bonds: --$40.46 million school building GO bonds, series 2000B at ‘AA+'. The Rating Outlook is Stable. SECURITY The bonds are secured by the county’s full faith and credit and ad valorem taxing power, without limitation as to rate or amount. KEY RATING DRIVERS STRONG RESERVES; POSITIVE OPERATING MARGINS: The district has managed to maintain strong positive operating margins over the past six years and achieved formidable reserve levels to offset unexpected financial pressures. PRUDENT MANAGEMENT: Management has prudent policies, budgets conservatively, and conducts multi-year forecasting, allowing the district to comfortably manage state-imposed property tax levy limitations. AFFLUENT ECONOMY: The district’s economy is affluent, with a sizable taxable value and above-average wealth and income levels. AVERAGE DEBT PROFILE: Debt levels are average, benefiting from pay-as-you-go (paygo) financing and full payout in ten years. Pension and other post-employment benefit costs are currently minimal. SECURITY The bonds are general obligations of the district and secured by the district’s full faith and credit and unlimited taxing authority. CREDIT PROFILE The district, with a population of 33,010, is located in Lake County, 37 miles northwest of downtown Chicago. The district serves K-12 students of the affluent communities of Lake Zurich, Deer Park, Hawthorn Woods, Kildeer and North Barrington. SUBSTANTIAL FINANCIAL FLEXIBILITY The district has preserved strong operating margins with conservative budgeting despite smaller annual increases in the consumer price index, to which, under the state’s levy, the limit is tied. The district added $3.4 million or 5% of spending to fund balance in fiscal 2011. Positive operations were driven by a favorable variance in property tax revenues, special education program salaries, and some deferral of capital expenditures. The district withdrew from the county’s cooperative for special education services in 2011; the district is now providing these services at a lower cost. Positive variances in special education and weather-related expenditures led to fiscal 2012’s operating surplus of $5.3 million or 7.9% of spending and a high unrestricted general fund balance totaling 34% of spending. Included in this amount are legal settlements which resulted in $1.3 million ($1.9% of spending) in unanticipated general fund revenue. The district’s 2013 budget shows a $3.1 million surplus across all governmental funds and increases the property tax levy by a modest 2.8%. The budget prudently continues the district’s practice of paygo capital financing. Management reports actual expenditures tracking under budget for the first four months of the year, consistent with past performance. Management and the teachers’ bargaining unit recently settled a three-year contract which gives 2% annual raises for various concessions. AFFLUENT ECONOMIC BASE Wealth levels and housing values in the communities served by the district greatly exceed county and state medians. The district’s tax base, with a market value of $4.9 billion, has declined 9.1% over the past two years. The county assessor expects that taxable value will decline another 3% for the coming tax year, which is in line with estimates for the metropolitan region. Unemployment in Lake County has moderated to 7.8% in October 2012 from 9.1% in October 2011, below the state (8.4%) but above the national (7.5%) average. Enrollment has declined over the past six years, from 6,409 in 2007-08 to 5,910 in 2012-13 (-7.8%), which prompted the closure of a school in fiscal 2010. This decline is inconsistent with a relatively stable population (0.2% growth between census 2000 and 2010). Positively, recent declines have been considerably less than management projections and further school closures are currently not contemplated. Fitch notes that per-pupil funding is not a major revenue for the district ($2.1 million or 2.8% of 2012 revenues) and therefore financial impact to the district of further marginal declines is likely to be manageable. STATE PENSION REFORM MAY COST-SHIFT TO DISTRICT The district participates in the Teacher’s Retirement System of the State of Illinois (TRS), contributions to which are currently made on behalf of the district by the state, and the Illinois Municipal Retirement Fund (IMRF). TRS is poorly funded at 48% and 42% using Fitch’s more conservative 7% discount rate assumption. The funded ratio for the district’s IMRF plan is 77%, or an adequate 73% using Fitch’s more conservative 7% discount rate assumption. Fitch notes that the TRS plan is the larger of the two plans. The district additionally participates in the state-run retiree health care plan, making a minimal $288,000 payment in fiscal 2012. Cost of carry in 2012 was a manageable 12.6% of general and debt service fund spending. The state legislature is currently considering pension reform. The state makes on-behalf-of payments to the teachers’ pension system for the district. The district is prudently exploring scenarios that shift the normal cost from the state to the district and plans for funding out of the current budget. Management believes that a full phase-in would represent approximately $3.2 million in fiscal 2014. Fitch believes that the district could manage this additional cost given its proactive management and low relative taxes. AVERAGE DEBT BURDEN The district’s overall debt burden is an average $3,491 per capita and 2.3% of market value. Amortization is very rapid, with full payout in ten years and debt service represented an average 10.6% of general and debt service fund expenditures in fiscal 2012. The district has no near-term plans to issue additional debt and will continue to prudently fund short-term capital needs on a paygo basis.