Fitch Rates $4.7MM Champaign, IL GO Bonds 'AAA'; Outlook Stable
--$4.7 million of GO bonds, series 2016.
Fitch has also affirmed the city's 'AAA' Issuer Default Rating (IDR) as well as the 'AAA' ratings on the city's $58 million of GO bonds currently outstanding.
The Rating Outlook is Stable.
Sale information: $4,700,000 GO refunding bonds, series 2016, expected to sell the week of Sept. 19 via negotiation.
Security: The unlimited tax pledge of the City of Champaign, IL.
Purpose: To refund the city's outstanding series 2007A bonds for net present value savings.
Final Maturity: Dec. 15, 2023.
The bonds are full faith and credit general obligations of the city, payable from ad valorem taxes levied on all taxable property in the city without limitation as to rate or amount.
KEY RATING DRIVERS
The affirmation of Champaign, IL's IDR and GO rating at 'AAA' reflects the city's robust local economy and broad revenue-raising flexibility, which together are likely to result in revenue growth that outstrips the natural growth rate of its expenditures in the coming years. The 'AAA' rating also reflects the city's low long-term liability burden, which is composed mostly of overlapping debt obligations, and what Fitch believes to be a high level of fiscal resiliency based on the city's financial history, superior gap-closing capacity and solid general fund reserves.
Economic Resource Base
Champaign is a city of approximately 85,000 residents located in central Illinois 135 miles south of Chicago. The city, along with its sister city of Urbana, is home to the University of Illinois at Urbana-Champaign. The university acts as a stabilizing factor on the city's employment and economy. As of 2015, the university had an enrollment of just over 44,000 students and employed approximately 14,100 faculty and staff. Equalized valuations have grown strongly in the past two years, driven by significant new construction activity within the city for both commercial and residential building projects. Wealth levels are slightly below average, but are artificially skewed downward due to the large student population living within the city.
Revenue Framework: 'aaa' factor assessment
Fitch anticipates that Champaign's revenue growth pattern will continue to be strong, with tax and fee revenues likely to rise in line with or above the level of U. S. GDP. Champaign's independent legal ability to raise revenues is high due to its status as an Illinois home rule municipality.
Expenditure Framework: 'aa' factor assessment
Fitch expects Champaign's spending will increase at a pace that is slower or equal to its pace of revenue growth. The city maintains solid expenditure flexibility as management has the power to reduce capital spending and consolidate some functions in order to cut costs. Fixed carrying costs were moderate at about 15% of expenditures in fiscal 2015.
Long-Term Liability Burden: 'aaa' factor assessment
Champaign's long-term liability burden, which is composed of its net debt including overlapping debts, along with its unfunded pension liabilities, is low at 6.8% of personal income and expected to remain so.
Operating Performance: 'aaa' factor assessment
The city's strong revenue-raising powers and reserve levels underpin its capacity to manage through future economic downturns without impairing its fundamental financial flexibility. Budget management during the recovery has been highly conservative and effective, as the city has focused on building up its reserve cushion while maintaining an elevated level of capital investment.
CONSERVATIVE BUDGETING PRACTICES: The rating is sensitive to changes in the city's budgeting practices and policies that mark a departure from its long-standing practices of fiscal conservatism.
REVENUE GROWTH PATTERNS: A significant reduction in Fitch's expectations for strong city tax revenue growth prospects, or changes in state statutes that constrain the city's ability to raise revenues, could result in negative pressure on the rating.
Champaign has grown at an accelerated pace through annexations of unincorporated areas bordering the city, in tandem with residential investment and county-wide economic planning efforts. The private sector, the local community college (i. e. Parkland College) and the university have all participated actively in these initiatives. The strength of the local economy and Champaign County's development program was demonstrated when the city's tax base grew steadily from 2007 through 2011 even while Illinois and the U. S. were mired in recession and in the slow recovery that followed. After three years of small declines in assessed values given an assessment lag in Illinois, Champaign's tax base returned to steady growth in 2015 and 2016, spurred on by positive trends in construction and local housing market values. Some of the most active development is taking place in areas adjacent to the university campus and the university's nearby research park.
The city's unemployment rate remains broadly comparable to state and national averages, with robust employment growth far outpacing a slight decline in the labor force. Educational attainment levels among city residents are far above average, with 53% of residents holding a bachelor's degree or higher, compared to 33% in Illinois and 30% for the U. S. Fitch regards the city's highly educated workforce as an asset that is likely to help spur strong future economic growth. The poverty rate is artificially high at 28% given the large student population residing in the city.
Champaign's home rule status affords it considerable revenue-raising flexibility. The largest general fund revenue sources as of fiscal 2015 were state transfers of income and the state sales taxes (a combined 37%), home rule sales taxes (25%) and property taxes (16%). A combination of telecommunications, utility and hotel room taxes and minor local taxes together account for 11% of general fund revenues, while licenses & permits generate 4%.
Fitch estimates the city's 10-year general fund growth rate from 2004 through 2014 at roughly 6.5% - well above both the inflation rate and the pace of U. S. GDP growth for the same period. This relatively high level of growth primarily reflects natural expansion of the city's economy, along with a small number of policy actions on the part of city management that included raising the city's hotel-motel tax to 7% from 5% and in 2012. An increase in the city's home rule sales tax to 1.5% from 1.25% that occurred in January 2015 positively impacted fiscal 2015 revenues, but is not factored into Fitch's calculation of the city's 10-year general fund growth rate through 2014.
The city's strong revenue performance also reflects the recession's relatively mild impact on the city. Even when property values across the state were declining during the 2009 to 2012 period, Champaign's taxable values and sales tax receipts continued to exhibit healthy growth. Rapid expansion of the city's population, which rose by 20% between 2000 and 2010 due both to natural growth and to the annexation of a large number of developed properties in 2005, has supported robust expansion of sales and income taxes, partly because highly-educated professionals are heavily represented among new residents. Fitch believes that Champaign's revenues will continue to grow at a rate above the pace of U. S. GDP in the absence of management action, given healthy development activity in the city.
The city has ample independent legal ability to raise revenues. As a home rule municipality under Illinois law, Champaign has access to a broad array of taxes and fees, many of which do not have a legal limit.
Public safety comprises by far the largest portion of general fund spending at 67% of the total, followed by general government (20%) and public works (12.5%). Where public safety spending is concerned, $21.3 million out of the $37.8 million in public safety spending in fiscal 2015, or 38% of total general fund spending, related to the police department, while the remaining $16.5 million of spending related to Champaign's fire department.
The natural pace of spending growth should remain roughly equal to or slightly slower than the pace of revenue expansion, given the city's underlying economic trends and, in particular, its rapid rate of revenue growth during the present economic recovery. General fund revenues grew by over 9.5% between fiscal 2011 and fiscal 2015, compared to general fund expenditure growth of approximately 8%. We expect these trends will continue.
The city maintains solid expenditure-cutting flexibility given that a portion of the city's capital spending, particularly for streets and sidewalks, is rolled in with public works spending. The city also handles spending for certain capital items such as computer hardware and software as part of its general government line items. If necessary to maintain a balanced budget, management believes targeted cuts of over $ 1million to equipment and personnel could be made across all major departments, while allowing the city to maintain a high level of service. Carrying costs for debt service, pensions and other post-employment benefits (OPEB) were moderate at 14.7% of governmental spending in fiscal 2015.
Management reports that labor relations remain constructive, with labor contracts most commonly reached through negotiation. The police and fire unions have occasionally resorted to interest arbitration, but this has not happened since 2010 for the firefighters prior to the year 2000 for the police. Police and fire employees do not have a right to strike under Illinois law.
Long-Term Liability Burden
Champaign's long-term liability burden is relatively low; Fitch estimates that the city's long-term liabilities equal slightly less than 7% of its combined personal income - well within Fitch's 'aaa' assessment level. Half of this metric consists of the overlapping debt obligations of Champaign County, Champaign City School District, Parkland College District and several smaller units of government whose borders overlap with those of the city. Amortization of the city's direct debt burden is fairly rapid with 82% scheduled to be repaid within 10 years. In Fitch's view, the city's rapid repayment schedule could generate additional flexibility within the operating budget as funds earmarked for debt service become available to fund operations. All of the city's GO debt is currently supported by revenues other than property taxes, but property taxes are legally pledged and would be available to cover GO debt payments if the revenues currently earmarked for debt service were to underperform.
Close to 25% of the city's long-term liability metric is derived from the pension liabilities associated with two single-employer pension plans the city maintains for its police and fire employees, as well as from the city's proportionate share of the Illinois Municipal Retirement Fund's unfunded liability. Where the police and fire plans are concerned, the city has consistently paid more than the annual actuarially determined contributions (ADC). It plans to amortize the remainder of the plans' outstanding liability through 2029, rather than 90% through 2040 as permitted by state law. As of June 30, 2015, the police plan had a 76% assets-to-liabilities ratio, while the fire plan had an 83% assets-to-liabilities ratio, assuming a 7% rate of return on investments for both plans.
The city's exposure to OPEB is limited mainly to an implicit rate subsidy. A small portion of OPEB exposure (less than 5%) results from a state mandate that the city pay the cost of health insurance for disable police officers and firefighters. The city's unfunded OPEB liability is minimal at $9.8 million, amounting to only 0.3% of personal income.
Fitch believes that the city is exceptionally well-positioned to manage the challenges associated with a moderate economic downturn while maintaining a high degree of financial and budgetary flexibility. Champaign's broad revenue-raising powers, combined with moderate carrying costs and solid control over expenditures, afford the city substantial gap-closing capacity. Management would be able to close all but the most severe budget gaps with a minimal impact on service delivery, and the city can rely on an ample reserve cushion to absorb the effects of more pronounced future cyclical revenue declines, should they occur.
Fitch would characterize the city's financial operations as conservative, with careful cost management and the use of multi-year financial forecasts. City budget officials utilize monthly revenue reports, quarterly financial reports and a variety of budget checks on all significant purchases to help guide the city's allocation of fiscal resources. These controls have assisted the city in formulating timely and effective responses to challenging economic conditions in the past; Fitch believes they will have the same effect going forward.
Champaign has achieved five consecutive operating surpluses since fiscal 2010 that have raised its general fund reserve levels to over $26 million, equal to approximately 39% of general fund expenditures at fiscal 2015 year-end. This represents a notable expansion in fiscal reserves since the end of the last down-cycle, when Champaign's general fund balance totaled $15 million (2010 fiscal year-end), or about 24% of expenditures. Fiscal 2015 concluded with a $3.1 million operating surplus despite the planned appropriation of $4.1 million of reserves for one-time items. Management has typically appropriated a portion of general fund reserves to balance the budget, but has seldom used the appropriated funds.
The city budgeted a $16.7 million deficit across all funds for fiscal 2016 (June 30 year-end), including a $10.5 million appropriation of general fund balance, largely to fund various capital projects. Management estimates that the city finished fiscal 2016 with a $14 million addition to fund balances across all funds on a budgetary basis. Fitch believes that actual results are likely to be better than budgeted given the city's history of outperforming budget and adherence to prudent financial planning.