Fitch Ratings has assigned an ‘AAA’ rating to $14.65 million city of Elgin, Illinois (the city) general obligation (GO) refunding bonds, series 2012.
The bonds are expected to be sold via negotiated sale the week of Feb. 20. Proceeds will be used to refund outstanding bonds.
In addition, Fitch affirms the following ratings:
--$89.47 million outstanding GO bonds at ‘AAA’.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by the general obligation, unlimited tax pledge of the city.
KEY RATING DRIVERS
STRONG FISCAL MANAGEMENT: Elgin’s conservative fiscal management, extensive financial planning and healthy reserve levels provide ample financial flexibility.
DIVERSIFIED REVENUE STREAM: The city prudently implemented several new revenue sources in 2012 to reduce dependence on property taxes and declining gaming revenues.
MODEST DEBT BURDEN: The city’s low direct debt burden reflects the use of riverboat casino revenues for capital expenditures and the issuance of self-supporting debt. Notably, all of the city’s non-self-supporting debt is retired within 10 years.
DECLINING VALUES: After an extended period of rapid expansion fueled by annexations, the city’s growth has tapered off. Lack of new annexations and minimal development of recently annexed lands has resulted in modest declines in equalized assessed value.
BELOW-AVERAGE PENSION FUNDING: The city’s pension funding levels have historically been low despite the city’s practice of fully funding its statutory required contributions. Fitch expects recent benefit changes will help stabilize the funded positions of the city’s pension plans.
CREDIT PROFILE
HISTORY OF ANNEXATIONS SLOWS FOR OUTER CHICAGO SUBURB
Elgin is located 40 miles northwest of downtown Chicago. Approximately 80% of the city’s assessed value is in Kane County, and 20% is in Cook County. The city maintains a relatively broad employment base that includes health, business and professional services and retail sectors. The unemployment rate in November 2011 was a high 12.0%, which is below past rates but still well above state and national levels. Elgin’s population has grown 14.5% since 2000 to 108,188 in 2010.
Housing prices and assessed value have declined during the national recession, but are expected to level off. The city has historically actively annexed adjacent areas to fuel growth, with over 8,200 acres added from 2000 to 2009. Annexations have since tapered off and a large development project in the western part of the city has made minimal recent progress. However, the city has also been able to reduce the expenses related to this project, such as delaying construction of an additional fire station, offsetting some of the loss in potential revenue.
DIVERSIFYING REVENUES SHOULD HELP CITY TO MAINTAIN STRONG FINANCIAL FLEXIBILITY
Elgin’s property tax rate has been flat for over 10 years and property tax revenues have made up almost 50% of general fund revenues. Due to the declines in assessed value, property tax rates will be raised slightly in 2012, but total general fund property tax revenue will go down $1 million (a 3% decline). The city has budgeted for further declines in property tax revenues going forward.
Beginning in 2012, the city has prudently initiated alternative sources of revenue to offset declines in property tax revenues and diversify its revenue streams. The city implemented a refuse collection fee in January that is budgeted for $4.7 million of revenue in 2012. Additionally, new natural gas, electricity and alcoholic beverage taxes will commence on July 1, 2012, yielding an estimated $3.5 million in 2012. The sales tax will also be increased in July, though the additional 0.5% will be directed to a capital improvement fund.
The city had a $2.4 million operating surplus in 2010, though unreserved fund balance declined slightly to $31.4 million or a high 35.4% of expenditures. The city budgeted a $1.7 million fund balance draw in 2011 but unaudited results show a $1.3 million surplus (1.4% of expenditures). The surplus in 2011 was driven by sales tax revenues exceeding budget by 7% and the police and fire departments securing outside grant funding. The 2012 budget features a $7 million surplus, highlighted by revenue generated by the new tax sources. Additionally, the city has actively managed its expenses, and eliminated 29 positions in late January, saving $1.8 million in 2012.
LOW DIRECT DEBT LEVELS
Most of the city’s outstanding debt is self-supporting through water and sewer revenues. The city’s non-self-supporting direct general obligation debt is a low $188 per capita or 0.3% of market value, but significant overlapping debt brings these levels up to a moderate $2,324 per capita or 3.4% of market value. The city plans to issue little non-self-supporting debt in the near future and amortization remains very rapid, with all non-self-supporting debt amortizing within 10 years.
DECLINING CASINO REVENUES
Direct debt has been kept low through the use of riverboat gaming revenues to finance capital improvement projects. General economic conditions combined with a new riverboat casino opening in nearby Des Plaines in mid-2011 led to a 25% decline in gaming revenues after the opening, which was less harsh than the city’s budgeted 35% decline. Despite the decline in gaming revenues, these funds should still be adequate to finance most upcoming capital needs in the city’s five-year capital improvement plan, and the city is exploring improvements to the casino and surrounding area.
WEAK PENSION FUNDING
The city has four pension plans: single-employer plans for police and fire and the state-run Illinois Municipal Retirement Fund (IMRF) and Sheriff’s Law Enforcement Personnel (SLEP). Payments for SLEP are minimal. Although the city pays the actuarially based annual required contribution (ARC) for its pension liability and some years has contributed more than the ARC, the funded ratios for the three major funds remain well below average. Using Fitch’s conservative 7% rate of return, as of Dec. 31, 2010 IMRF is 47.7% funded, the police pension is 44.3% funded and fire is 50.9% funded. Recent changes in pension funding requirements should make this funding obligation more manageable, but Fitch will monitor funding levels for further declines. The city’s ARC in 2011 was manageable within the operating profile of the city, equivalent to 10.4% of general fund expenditures.