Fitch Affirms Lake Zurich CUSD #95, IL GOs at 'AA+'; Outlook Stable
--$27.3 million school building GO bonds, series 2000B;
--Issuer Default Rating (IDR).
The Rating Outlook is Stable.
The bonds are supported by the county's full faith and credit and ad valorem taxing power, without limitation as to rate or amount.
KEY RATING DRIVERS
The 'AA+' rating considers the district's slow revenue growth prospects, solid expenditure flexibility, low long-term liability burden and strong gap closing capacity during times of economic downturn.
Economic Resource Base
The district is located in Lake County, 37 miles northwest of downtown Chicago, with a 2014 population of 31,054. The district serves primary and secondary students of the affluent communities of Lake Zurich, Deer Park, Hawthorn Woods, Kildeer and North Barrington.
Revenue Framework: 'bbb' factor assessment
Fitch expects the natural pace of revenue growth to keep pace with the level of inflation. Like many U. S. school districts, the district has minimal independent legal ability to raise revenues.
Expenditure Framework: 'aa' factor assessment
Fitch expects the district's natural pace of spending growth to be above the expected pace of revenue growth. Carrying costs are low and the management has identified some additional expenditure flexibility.
Long-Term Liability Burden: 'aaa' factor assessment
The long - term liability burden, including overall debt and direct pension liabilities, is low relative to district personal income.
Operating Performance: 'aaa' factor assessment
The district has exceptionally strong gap closing capacity given solid expenditure flexibility and moderate revenue volatility. Management has shown the ability to rapidly rebuild financial flexibility during times of recovery.
Sustained Reduction in Enrollment: The district is susceptible to meaningful reductions in state revenues should enrollment decline significantly.
The district's tax base has declined approximately 15% since its peak in fiscal 2010. However, taxable values began to stabilize in fiscal 2015 with modest growth of 1%. The county assessor expects that TAV will continue to grow in 2016 and conservatively estimates increases in line with inflation.
Enrollment has declined by a sizable 14% over the past 10 years, to 5,673 in 2015-16, which prompted the closure of a school in fiscal 2010. This decline has been inconsistent with a relatively stable population (0.2% growth between census 2000 and 2010) and is attributable to small incoming kindergarten classes. More recently, 10 new students (0.17%) were added in the current 2016-2017 school year but Fitch believes that district may still be vulnerable to enrollment decline risk.
Property taxes comprise 65% of general fund revenues, while intergovernmental revenues are equal to a modest 7% of general fund revenue.
Ad-valorem revenues are expected to grow at the rate of inflation, absent management action, due to increases in assessed value (AV) occurring at a similar rate. Taking policy action into account, Fitch expects that tax revenues are likely to grow at a rate marginally above that of inflation due to management's history of raising the property tax levy on an annual basis, within state tax cap limitations.
State aid is expected to decline, as recent enrollment losses have been considerable. Despite these declines, per-pupil funding is a modest $374 per pupil; therefore Fitch believes the financial impact of further declines, unless they accelerate, is likely to be manageable.
Independent legal ability to raise revenues is limited. The general fund property tax levy is limited by the Property Tax Extension Limitation Law to the lesser of 5% or the rate of inflation, plus new construction.
Charges for fees and services may be legally raised without limitation but do not represent a meaningful percent of spending.
The district allocates 52% of general fund spending to student instruction related expenses..
The natural pace of spending growth is expected to be above expected natural revenue growth, given expectations for the district's revenue stream and the nature of its spending obligations.
Expenditure growth is largely driven by labor force salary increases and employee benefits costs. The district is currently in the first year of a three-year contract which stipulates salary increases of 4% in year one, 3.25% in year two, and 2.5% in year three.
Carrying costs for pension, other post-employment benefits (OPEB) and debt service is equal to 8.7% of governmental spending. Expectations for declining debt service costs will likely reduce carrying cost levels over the next 10 years. The state of Illinois pays for the bulk of teacher pension costs, reducing what might otherwise be a substantial fixed cost burden.
The district carefully manages expenditures and has identified cost savings equal to approximately 4% of general fund expenditures. Areas of expenditure reduction include pay-go capital, staff reductions, and other areas of discretionary spending.
Long-Term Liability Burden
The long-term liability burden is low relative to the resource base. The net pension liability plus overall debt represents 5% of personal income. Overlapping debt accounts for approximately 60% of the long-term liability burden, with direct debt accounting for 35% of the liability. Amortization of direct debt is rapid with 100% of debt scheduled for retirement in 10 years. While the district intends to issue new debt in the future, Fitch anticipates that the long-term liability burden will remain low.
The district participates in The district participates in the Teacher's Retirement System of the State of Illinois (TRS), contributions to which are currently made on behalf of the district by the state, and the Illinois Municipal Retirement Fund (IMRF). The state records the majority of the teacher's pension liability on its balance sheet, with only a small portion accruing to the district. The combined plans report an assets-to-liabilities ratio of 82.5% when using a 7.5% rate of return, and 78.2% when using Fitch's more conservative 7% discount rate as of Dec. 31, 2014. The district also participates in the state-run retiree health care plan, making a minimal $273,000 payment (0.34% of spending) in fiscal 2014.
Financial performance has remained positive despite regular use of general fund resources for pay-go capital spending during the great recession, which reduced robust reserves during a period of limited revenue growth under the state's tax levy cap. The district's ample reserves provide superior gap-closing ability given its solid ability to cut expenditures and moderate expected revenue volatility, consistent with a 'aaa' financial resilience assessment.
Conservative budgeting has preserved strong operating margins with additions to fund balance in each of the last eight fiscal years. Management has plans to use unrestricted fund balance for routine pay-go capital but is committed to maintaining reserves within their 25% fund balance policy. Fitch believes that the district has demonstrated a willingness to increase financial flexibility during times of recovery and has the ability to rapidly rebuild reserves if needed.