NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the following Chicago Park District (CPD), IL general obligation bonds:
--$75 million limited tax general obligation (LTGO) parks bonds, series 2016A;
--$8 million LTGO refunding bonds, series 2016B;
--$17 million LTGO refunding bonds, series 2016C;
--$4 million unlimited tax general obligation (ULTGO) series 2016D (personal property replacement tax alternate revenue source);
--$15 million ULTGO refunding bonds, series 2016E (special recreation activity alternate revenue source).
In addition, Fitch affirms the 'AA-'rating on the following:
-- $ 127.6 million LTGOs;
-- $28.2 million ULTGOs;
--Issuer Default Rating (IDR).
The Rating Outlook remains Stable
The bonds will be sold via negotiation the week of October 24. Proceeds will be used to finance various capital projects and refund outstanding debt.
SECURITY
The LTGO bonds are general obligations of the district payable from ad valorem taxes levied without limitation as to rate but limited as to amount by provisions of the statewide Limitation Law on all taxable property within the boundaries of the district. The ULTGO bonds are general obligations of the district, payable from ad valorem taxes, unlimited as to rate or amount.
KEY RATING DRIVERS
The 'AA-' IDR and LTGO rating are based on the district's strong financial performance. Significant available reserves provide an offset to the district's limited ability to independently increase revenues and uncertainty regarding the impact of pension reform on spending flexibility. The rating additionally reflects the diverse and stable economy which serves as the state's economic hub.
Economic Resource Base
The district was created in 1934 and is coterminous with the city of Chicago. It is one of the largest municipal park districts in the world, comprising 8,300 acres of green space in 585 parks, 231 field houses and 26 miles of lakefront property. Private cultural institutions that operate facilities on district property include the Museum of Science and Industry, Field Museum of Natural History, DuSable Museum of African American History, Adler Planetarium, John G. Shedd Aquarium, and the Art Institute of Chicago. Chicago serves as the economic and cultural hub for the Midwest region, and maintains good prospects for long-term stability if not growth.
Revenue Framework: 'bbb' factor assessment
Fitch believes that revenue growth will be closer to that of the U.S. economy's despite sluggish increases over the past decade, based on a slow recovery from the most recent recession. The district has moderate independent legal ability to increase revenue primarily through concessions and recreational activity and program fees.
Expenditure Framework: 'aa' factor assessment
Fitch expects natural expenditure growth to be in line with to slightly above revenue growth. The district has significant flexibility over operating costs. Carrying costs for pension, debt service and other post-employment benefits (OPEB) are currently moderate but will likely increase based on concerns regarding the legal ability to implement pension reform.
Long-Term Liability Burden: 'aa' factor assessment
The burden of long-term debt and direct pension obligations is moderate relative to the district's economic resources although large pension liabilities of overlapping governmental entities including the City of Chicago and Chicago Public Schools are an ongoing concern.
Operating Performance: 'aaa' factor assessment
The district has exceptional capacity to manage through an economic downturn. Management has maintained strong reserve levels through the current economic recovery although annual pension contributions have consistently fallen well short of actuarially-based amounts.
RATING SENSITIVITIES
Pension Funding Risk: Failure to implement a sustainable plan to consistently fund the actuarially required pension contribution would cause downward rating pressure.
CREDIT PROFILE
The city has regained almost 50,000 jobs since 2010, reflecting approximately 10% of the job loss during the recession. The recovery has primarily been in professional and business services despite reductions in both manufacturing and public service. Chicago's population totaled 2.7 million in 2014, down 6% from the 2000 census, but still accounts for 21% of the state's population. Economic indicators are mixed with elevated unemployment and individual poverty rates, average per capita income levels, but strong educational attainment levels.
Revenue Framework
The district receives almost 60% of its general fund revenues from property taxes, which account for a small 5.5% of the total tax bill for a Chicago resident. The remainder are from concession contracts including receipts from Soldier Field events (18%), personal property replacement tax (9%) and fees, permits, contracts and other revenues.
District revenue growth has been below the rate of inflation over the past decade despite tax rate adjustments to offset assessed value declines. Fitch believes revenue growth will likely be roughly in line with inflation absent tax rate adjustments because recent economic development should result in growth in property values.
Expenditure Framework
Park operations and maintenance account for approximately 37% of spending, followed by recreational programs and special services. Salary and wages account for approximately one third of budgeted operating expenditures.
Fitch expects the natural pace of expenditure growth to be moderately above sluggish revenue growth based on moderate salary and benefit cost increases. The district added 39.5 full-time equivalent positions in 2016 due to growth in programs, facilities and acreage and in cases in which the additional positions would generate either revenue or savings.
Given the district's recreational purpose, Fitch believes expenditure flexibility is greater than for most full-service governments. The district's ability to delay or cut projects from its capital plan and reduce staffing, approximately half of which is part time, is significant. The district has a history of adjusting spending as needed to maintain stable reserve levels.
Carrying costs for debt service, pensions and OPEB is currently 23% of total general fund expenditures. Debt service is expected to remain steady and future borrowing plans are moderate; however, pension costs are expected to increase over the next several years, since the district has been underfunding the actuarial required contributions (ARC). Beginning January 2015, the district enacted pension reform legislation to increase annual funding. During 2015, the district paid 84% of its ARC which included a $12.5 million supplemental contribution above the statutory payment. The amendments require additional supplemental employer contributions of $12.5 million in 2015 and 2016 and $50 million in 2019. The district is currently in litigation with one of the labor unions regarding the constitutionality of the amendments to the state pension code that allowed for the supplemental payments and alterations in pension benefits, which adds a level of uncertainty to pension funding requirements.
Long-Term Liability Burden
The long-term liability burden is moderate at approximately 15% of personal income, of which about 3% represents pensions. The net pension liability burden assumes successful implementation of pension reforms that are in litigation. The long-term liability burden would remain moderate even if the reforms are overturned. The overlapping entities of the City of Chicago, Chicago Public Schools and Cook County all face elevated debt and pension underfunding, which are not included in CPD's long-term liability burden calculation. The resulting burden on the resource base is nonetheless a concern for Fitch.
The district maintains a single-employer pension plan that is governed by state law. The plan's assets are only 43% of liabilities using a 7% discount rate. The recent pension reform, if upheld, would materially improve the district's pension outlook from the prior projected asset depletion date of 2023. Beginning in fiscal 2015, the contribution rates for employees increase at periodic intervals, the retirement age was raised and cost of living increases lowered. If the pending pension reform litigation is ruled unconstitutional, district's net pension liability would likely increase by $111 million or 23% by 2018. The district continues to work with all parties including the state and labor unions to find a long-term solution to fund the net pension liability.
Operating Performance
The district has maintained ample general fund reserves relative to inherent budget flexibility and potential revenue volatility in a moderate economic downturn, as illustrated by Fitch's scenario analysis tool. Fitch assesses the district's inherent budgetary flexibility as 'midrange' given the revenue limitations and solid ability to reduce expenditures.
Management has consistently maintained stable financial operations reflected in the district's strong operating performance over the past decade; however, incorporated into that performance is the district's consistent underfunding of pension obligations. The district adheres to otherwise strong financial policies including the requirement to maintain a minimum working cash balance of $85 million (28% of general fund spending) and identifying pay-go sources for capital improvement projects. Included in the district's available general fund reserves is the working cash fund with a current balance of $96 million, $25.8 million in the economic stabilization reserve, $5 million in the personal property replacement tax revenue stabilization reserve and $35 million long-term liability reserve. Fitch believes that the failure to successfully implement sustainable, affordable and actuarially-based pension funding measures could have a negative impact on the rating.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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