Fitch Upgrades Grundy, Kendall & Will Counties Community High School District Number 111, IL's IDR
--Long-Term Issuer Default Rating (IDR) to 'A+' from 'A';
--$8.3 million general obligation (ULTGO) bonds, series 2008 to 'A+' from 'A'.
The Rating Outlook is Stable.
The ULTGO bonds are obligations of the district, payable from its full faith and credit and its unlimited ad valorem tax on all taxable property within the district.
KEY RATING DRIVERS
The upgrade of the IDR reflects implementation of Fitch's revised criteria for U. S. state and local governments, which was released on April 18, 2016. The revised criteria place increased focus on the ability of an entity to manage through economic cycles and the long-term liability burden in relation to personal income. The 'A+' IDR rating incorporates the district's strong gap-closing capacity and ability to manage through economic downturns, moderate long-term liability burden, the limited ability to increase revenues, and adequate expenditure controls.
Economic Resource Base
The district is located 42 miles southwest of Chicago in a rapidly growing area near Interstates 80 and 55 and serves the villages of Minooka, Channahon, and Shorewood, as well as a small portion of the city of Joliet. The district's 2016 enrollment of 2,679 marks a cumulative 5% increase from 2012 levels. Enrollment is further expected to increase by 8% through 2022. The district's 2015 population of 38,000 marks a cumulative 98% increase from 2000 levels, although growth has stabilized over the last five years.
Revenue Framework: 'a' factor assessment
Fitch expects that the district's revenue will grow at the rate of inflation. The district is operating at its maximum operating tax rate which constrains its ability to raise revenue absent growth in the tax base.
Expenditure Framework: 'a' factor assessment
The district's expenditure growth is expected to increase at a rate above natural revenue growth and the district has adequate control over its expenditures.
Long-Term Liability Burden: 'aa' factor assessment
The district's long-term liability burden including net pension liabilities and overall debt is moderate relative to personal income.
Operating Performance: 'aa' factor assessment
The district has strong capacity to manage through an economic downturn with a combination of expenditure control and financial cushion. It has maintained reserves at a high level through the current economic recovery, largely through the issuance of working cash bonds.
Structurally Balanced Operations: The 'A+' rating assumes that the district achieves structural balance between recurring revenues and expenditures in the medium term.
The tax base is concentrated in manufacturing, mitigated somewhat by industry diversification. Median household income exceeds the state and national averages and the poverty rate is low, despite above-average regional unemployment.
The district has two main sources of revenue in its operating funds (educational, operations and maintenance, transportation, working cash, and tort funds). Property tax comprised 84% of fiscal 2015 revenue and state aid 15%. The district is not subject to the Property Tax Extension Limitation Law (PTELL) but is subject to tax rate limits. This enables the district to fully leverage growth in the property tax base, but also leaves it susceptible to declines in assessed valuation (AV).
Fitch expects the district's revenue to grow at a rate in line with inflation. The district's property tax base declined significantly from FY 2011 through FY 2015 before increasing by 1% in 2016 and 4.4% for the FY 2017 budget. While the district projects assessed values to grow at approximately 4%, the district would have revenue declines if AV again began to decrease.
The district is currently at the maximum property tax rate in each of its funds, leaving the only route to raise revenue in its capacity to issue $7.8 million in working cash bonds, which Fitch considers to be a non-recurring budgetary strategy. The district only has the ability to issue up to the legal debt limit.
The district's expenditures are largely driven by instruction and support service costs (94% of FY 2015 operating fund revenue). An additional 6% of expenditures comprise debt service costs.
Fitch expects that natural spending growth will be above natural revenue growth. The district is currently in the middle of a one-year contract with its teachers that contained a 3% step increase, which followed a three-year contract that had 6%, 5%, and 4% annual increases. Teachers maintain the ability to strike. Both the district's support and transportation staff chose to unionize in the past year. The district has not started negotiations with support staff, but the transportation staff did strike for seven days and negotiations are currently in mediation. The district's ability to manage future salary increases within a structurally balanced budget will be a credit factor in future rating actions.
The district maintains an adequate degree of expenditure flexibility. While carrying costs were low in FY 2015 at approximately 12% of governmental expenditures, the district has lost some flexibility with the unionization of the district's transportation and support staff. The negotiation of a longer-term contract with the teachers union is also a risk, given the ability of the teachers to strike and the current labor environment with the transportation workers having engaged in a strike within the past year.
Long-Term Liability Burden
The district's long-term liability burden is low, with debt and net pension liabilities at 11% of personal income. No new debt is expected in the medium term, although the district may issue up to $7.8 million in working cash bonds if it cannot achieve structural balance. If this were to occur, the district's liability burden assessment would likely stay in the 'aa' category.
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 (TRS), as cost-sharing multiple employer system. The state makes most TRS 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 approximately 73.1% assuming a 7% discount rate. The state is responsible for the vast majority of the district's TRS liability, with the district carrying only a small portion of this liability.
The district has maintained an exceptionally high level of available fund balance throughout the recession and subsequent recovery relative to potential revenue declines depicted by the Fitch Analytical Sensitivity Tool (FAST) in a moderate economic downturn scenario. Fitch expects that available general fund and other operating fund reserves (70% of expenditures in fiscal 2015 and no less than 43% of spending dating back to fiscal 2009) would remain well above the 'aaa' reserve safety margin level, throughout a moderate recessionary period.
While the district has made consistent efforts to maintain a high level of available reserves in the recent economic recovery, it has yet to achieve structural budget balance, increasing reserves by issuing working cash bonds in 2016. While the district states that this is a temporary solution and that it will achieve structural balance through property tax growth, the district is still in the early stages of that plan. Achieving structural balance and maintaining reserve levels will be a factor in maintaining the current rating in future rating actions. The district is expecting a FY 2016 deficit in the operating funds of $1.6 million, which would reduce available reserves to a still strong 66% of general fund expenditures and transfers.