Fitch Affirms Aurora West School District No. 129 ( IL)'s Bonds at 'AA-'; Outlook Stable
--Long-Term Issuer Default Rating (IDR) at 'AA-';
--$50.6 million general obligation (GO) bonds at 'AA-' (series 2015C and series 2016);
--$1 million lease certificates series 2003 (qualified zone academy bonds) at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are payable from lawfully available sources and ad valorem tax levy, without limitation as to rate or amount. The certificates are limited tax general obligations of the district, payable from general funds of the district and other lawfully available sources. The certificates are additionally payable by a state aid intercept mechanism (not rated by Fitch).
KEY RATING DRIVERS
The 'AA-' rating reflects Fitch's expectation that the district will maintain financial flexibility throughout an economic cycle despite a relatively weak revenue framework given the district's strong expenditure controls and solid reserve levels. The rating also reflects the district's low long-term liability burden.
Economic Resource Base
The district is located approximately 40 miles west of downtown Chicago in Kane County. The district's enrollment grew a modest 0.3% in the current school year reaching 12,627 students, a level the district expects to remain stable over the next five years. Historically, enrollment and population growth have been modest and the district projects continued modest enrollment growth going forward.
Revenue Framework: 'bbb' factor assessment
Fitch expects the district's revenue to grow at a rate in line with inflation. The district has virtually no independent legal ability to raise revenue.
Expenditure Framework: 'aa' factor assessment
The district's expenditure growth should grow at a rate slightly above revenue growth. Flexibility is supported by low carrying costs for debt and other long-term liabilities.
Long-Term Liability Burden: 'aaa' factor assessment
The district's long-term liability burden, including pension liabilities and overall debt, is low relative to personal income.
Operating Performance: 'aa' factor assessment
The district has very strong gap closing capacity to manage through an economic downturn and has returned to structural budget balance in FY 2015 and FY 2016 net of transfers for capital project.
Maintenance of Reserves: The 'AA-' rating is sensitive to the maintenance of reserves sufficient to address periods of economic downturn.
District enrollment has increased marginally in recent years and modest growth is expected to continue going forward. Income levels are slightly lower than state averages. Employment levels have been improving and are on par with the state and nation. Assessed value increased by 5.6% in FY 2016 and is projected to increase by 4% annually going forward, partially due to new development along the Interstate 88 corridor.
The district's revenue comes from two main sources, property tax revenue at 48% of general fund revenue (net of on-behalf pension payments made by the state) and state aid at 37%.
Fitch expects revenue to grow in line with the rate of inflation. While the district is projecting AV to increase at 4% annually, growth in the levy can only capture growth up to the lesser of 5% or the percentage increase in the Consumer Price Index during the preceding calendar year, plus new construction under the Property Tax Extension Limitation Law (PTELL). The district estimates that a quarter of the projected increase in AV is from new construction. District management also expects that state aid should increase slightly over the next several years as enrollment growth is projected to be level and a new state funding formula should be a net positive for the district.
Fitch views the district's independent legal ability to raise revenues to be severely limited. The district is a non-home rule unit of government and is subject to PTELL, which limits increases in the levy as described above. Voters in the district must approve any increases in the limiting rate.
The district's expenditures are largely driven by instruction costs (69% of FY 2015 general fund expenditures net of pension costs paid by the state on behalf of the district). An additional 24% of expenditures are comprised of general administration and support services.
Fitch expects that natural spending growth will be slightly above natural revenue growth. The district's collective bargaining agreements with its five unions contain annual step increases between 2% and 2.7%, which will be the main driver of expenditure growth.
The district maintains solid flexibility of its main expenditure items. The district's carrying costs are a moderate 10% of governmental expenditures and management maintains some control over managing headcount. Three of the district's unions, including the teachers' union, are under contract through FY 2017. The remaining two expire in FY 2018 and FY 2020.
Long-Term Liability Burden
The district's long-term liability burden is low, with debt and pension liabilities at 8.1% of personal income. Direct debt totals about $113 million. The district is authorized to issue an additional $25.5 million of debt, which it plans to do in the next 6 to 12 months. Approximately 13% of the total $223 million liability burden is in the form of pension liabilities.
The district participates in the Illinois Municipal Retirement Fund (IMRF), which is an agent multiple employer defined benefit pension system, as well as the Illinois Teachers' Retirement System (ITRS), a cost-sharing multiple employer system to which the state makes most payments on behalf of the district. The district covers the employees' portion of pension payments. Fitch calculates the ratio of assets to liabilities to be 70.3% assuming a 7% discount rate. The state is responsible for the vast majority of the district's ITRS liability, with the district carrying only a small portion of this liability.
Although the district has made planned draws on reserves from FY 2012 through FY 2015, it maintains very strong gap closing capacity to address an economic downturn. Given the district's midrange inherent budget flexibility and low revenue volatility, Fitch believes the district's reserves would remain above the 'aa' assessment level throughout an economic downturn.
The district has made planned draws on general fund balance in the recent recovery. In FY 2010, the district issued $12 million in GO limited tax bonds to increase the district's working cash fund (within the general fund) to finance capital projects. This artificially increased general fund reserves in FY 2011. From FY 2012 through FY 2014, the district transferred a cumulative $5 million out to fund capital projects, with the remaining $6.8 million transferred out in FY 2015. This transfer, combined with small operating deficits in FY 2012 through FY 2014, produced a decline in available reserves to $9.2 million (6.3% of general fund expenditures). Absent this, the district would have had an operating surplus of $2.7 million in fiscal 2015. The district projected that FY 2016 ended the year with a small surplus and reports that FY 2017 operations are balanced.