Fitch Rates Elgin, IL's GOs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following City of Elgin, Illinois (the city) general obligation (GO) bonds:

--$25 million GO corporate purpose bonds, series 2016.

The bonds are expected to be sold via competitive sale on Feb. 10, 2016. Proceeds will be used to fund street and facility improvements.

In addition, Fitch affirms the following ratings on the city:

--$74.85 million GO bonds at 'AAA';

--$5.025 million Illinois Finance Authority (IFA) local government program revenue bonds, series 2013C (City of Elgin Project) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the general obligation, unlimited tax pledge of the city. The bonds issued through the IFA are limited obligations of the authority, ultimately paid by the full faith and credit and unlimited tax pledge of the city.

KEY RATING DRIVERS

DIVERSIFIED REVENUE STREAM: The city prudently implemented several new revenue sources to reduce dependence on property taxes and potentially volatile gaming revenues.

STRONG FISCAL MANAGEMENT: Elgin's conservative fiscal management, extensive financial planning and prudent use of ample reserves are expected to reduce long-term liabilities.

MODEST DEBT BURDEN: The city's low direct debt burden reflects the use of riverboat casino revenues for capital expenditures. Amortization is rapid with 90% of the city's tax-supported debt retired within 10 years.

PROPERTY VALUES EXPECTED TO STABILIZE: Assessed values (AV) are expected to increase in 2016 after five years of declines. The city has reported an increase in permit and economic development activity in 2015 reflecting a stabilizing local economy.

BELOW-AVERAGE PENSION FUNDING: Pension funding levels have historically been low despite the city's practice of fully funding its statutory required contributions. Fitch expects recent benefit changes and over-funding of the actuarially required contribution (ARC) will help improve the funded positions of the city's pension plans over time.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics. The Stable Outlook reflects Fitch's expectation that such shifts are not likely.

CREDIT PROFILE

Elgin is located 40 miles northwest of downtown Chicago and benefits from its proximity to the city. Approximately 80% of the city's AV is in Kane County, and 20% is in Cook County. From 2000 to 2010, Elgin's population grew 14.5% driven by property annexations and 2014's population estimate of 111,117 reflects 2.7% of continued growth.

AV EXPECTED TO STABILIZE AFTER STEEP DECLINES

The city maintains a relatively broad employment base that includes health, business and professional services and retail sectors. The unemployment rate in November 2015 was 6.7%, which is down from 7.4% a year earlier but still above state and national levels of 5.8% and 4.8%, respectively.

AV declined 25% from 2010 through 2015 but is expected to level off in 2016 and 2017. The city has historically annexed adjacent areas to fuel growth, with over 8,200 acres added from 2000 to 2009. There were no annexations from 2010 through 2014; however, 4.35 acres were annexed in 2015 reflecting ongoing economic development activity. A large development project in the West Planning Area is expected to add 26,300 housing units by 2040. Additionally, the city had an uptick in permit activity in 2014 and 2015 and recent growth in home prices, which are expected to have a positive effect on AV levels.

DIVERSIFYING REVENUES TO HELP MAINTAIN FINANCIAL FLEXIBILITY

After over 10 years of flat property taxes, the city implemented a strategy to offset the declines and reduce reliance on property tax revenue by introducing four new revenues streams into the 2012 budget. These revenues include refuse collection fees, taxes on natural gas, electricity, and alcoholic beverage sales, and diversified general fund revenues, and provided additional financial flexibility. As a home rule city, Elgin has significant flexibility to adjust tax rates and fees as necessary.

PRUDENT USE OF RESERVES TO FUND LONG-TERM LIABILITIES

The city has consistently maintained high unrestricted fund balance levels after five straight years of operating surpluses from 2009-2013. A portion of the unrestricted fund balance consists of proceeds from riverboat gaming revenues which are used to fund most of the city's capital projects and are not available for operations. In fiscal 2014, the city utilized $4.9 million in general fund balance, ending the year with $68.6 million in unrestricted fund balance equivalent to 56.6% of general fund expenditures, down from 60.1% in fiscal 2013. Riverboat funds accounted for 27.5% of unrestricted general fund balance in fiscal 2014. The $4.8 million draw on general fund balance in fiscal 2014 was attributed to a $5 million supplemental police pension payment to fund the long-term pension liability.

Fiscal 2015 is expected to end with a $4.8 million draw on general fund balance which included a $5 million supplemental pension payment to the police and fire pension plan and $500,000 allocation to the other post-employment benefits (OPEB) liability. Sales tax revenue exceeded budgeted projections by 7.4% and, based on unaudited results the city will end the year with a $63.7 million unrestricted fund balance.

The fiscal 2016 budget includes a 3.3% property tax levy increase to maintain current service levels throughout the city's three-year finance plan. The budget assumes a 4.9% increase in sales taxes based on 2014 collections and 2015 estimates. Fitch believes these estimates are reasonable based on prior year results. The city is expected to maintain ample general fund balance given conservative budgeting practices and prudent use of reserves.

LOW DIRECT DEBT LEVELS; CASINO FUNDS CAPITAL PROJECTS

Most of the city's outstanding debt is self-supporting through water and sewer revenues. The city's tax-supported GO debt is extremely low, but significant overlapping debt brings the overall debt burden up to $3,073 per capita or a somewhat high 6.1% of market value. Minimal additional debt is planned, and 89.6% of debt amortizes within 10 years. Direct debt has been kept low through the use of riverboat gaming revenues to finance capital improvement projects. Riverboat gaming revenues have weakened in recent years due to increased competition throughout the state; however, capital needs are flexible and the city proceeds with projects as the funds become available.

WEAK BUT IMPROVING PENSION FUNDING

Pension benefits are provided through three primary pension plans: single-employer plans for police and fire administered by the city, and the Illinois Municipal Retirement Fund (IMRF), an agent plan. Elgin's share of IMRF is the smallest of the three plans the city contributes to and the best-funded at 73.9% as of Dec. 31, 2014, assuming a 7% rate of return. The police and fire plans have consistently had much lower funded ratios but are gradually improving. Using a 7% rate of return, as of Dec. 31, 2014 the police pension is 44.7% funded and fire is 47.7% funded.

Recent reforms including lower benefits for new hires should make pension obligations more manageable if assumed investment returns are achieved, but Fitch will continue to monitor progress. The city has consistently paid the full ARC, and has recently been making additional contributions that should help lower the liability. Most recently, the police and fire plan ARC was exceeded by $5 million in both fiscal 2014 and 2015 and the 2016 budget included an additional $1 million allocation to the police and fire pensions and $500,000 for OPEB in fiscal 2016. Fitch considers this a positive step in the city's effort to lower the liability. Total carrying costs for debt, pension and OPEB in 2014 were a moderate 19.9% of government fund expenditures, including excess contributions to the pension plans.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group {add or subtract as needed.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998557

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998557

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160128006366/en/

Fitch Ratings, Inc.
Primary Analyst
Shannon McCue
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeremy Stull
Analyst
+1-212-908-7839
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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