Fitch Downgrades Minooka CHSD 111, IL’s GOs to ‘A’; Outlook Stable

NEW YORK

Fitch Ratings has downgraded the following rating on Minooka Community High School District 111, IL’s (the district) outstanding bonds:

–$8.3 million unlimited tax general obligation (ULTGO) bonds, series 2008, to ‘A’ from ‘AA-‘.

The Rating Outlook is Stable.

SECURITY

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

DEFICIT FINANCING OF OPERATIONS: The downgrade reflects district plans to support structural operating gaps over the next four years with bond proceeds. Officials expect tax base growth will eventually close the budget gap, which Fitch views as optimistic.

STRUCTURAL IMBALANCE; ADEQUATE RESERVES: Tax base declines coupled with an inflexible revenue framework have opened a structural imbalance in the district’s operating funds. Fitch expects the imbalance to continue eroding the district’s reserve cushion, despite the infusion of working cash bond proceeds, barring policy action.

MANUFACTURING CONCENTRATION; ABOVE-AVERAGE INDICATORS: 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 extremely low despite above average regional unemployment.

MODERATE LONG-TERM LIABILITY BURDEN: Overall debt levels are high and carrying costs are a manageable portion of the district’s budget. The district’s pension and OPEB liabilities are limited, although the district is vulnerable to potential shifts in state pension contributions as the state continues to face financial pressures.

RATING SENSITIVITIES

FINANCIAL STABILITY: Material erosion of the district’s financial position beyond the planned spend-down of working cash bond proceeds may result in negative rating action.

CONTINUED TAX BASE DECLINES: Continued tax base declines would aggravate the district’s existing structural imbalance and could place negative pressure on the rating.

CREDIT PROFILE

The district is located 42 miles southwest of Chicago in a very rapidly growing area at the nexus of 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 2015 enrollment of 2,583 marks a cumulative 96% increase from 2000 levels and the district’s 2014 population of 38,379 marks a cumulative 98% increase from 2000 levels, although growth has stabilized over the last four or five years.

STRUCTURAL IMBALANCE; ADEQUATE CUSHION

Multiple years of tax base declines, coupled with a rigid statutory tax cap on operational millages, have contributed to a structural imbalance across the education, operations/maintenance, transportation, working cash, and tort funds (together, the operating funds). State aid has back-filled a portion of the lost property tax revenue, although not nearly dollar-for-dollar. Cash-basis of accounting limits the transparency of the district’s financial position.

The district has implemented expenditure cuts in fiscals 2014 and 2015, including increased class sizes, reduced paid days for support staff, eliminated programs, and eight teacher layoffs. Management reports that there is still flexibility to increase class sizes, as the district’s facilities are fairly under-capacity. However, Fitch does not expect further expenditure cuts of a material magnitude as the district plans to deficit spend working cash bond proceeds over the next four years.

District management currently projects the results of fiscal 2015 to post slightly better than the $3.5 million budgeted deficit across the operating funds, benefited by an unbudgeted $1.2 million one-time settlement from a top taxpayer. If the deficit were to materialize as budgeted, it would reduce cash-basis unrestricted operating fund balance to $13.2 million, a still adequate 40.2% of budgeted fiscal 2015 spending.

The district has yet to identify a clear strategy to resolve the ongoing structural imbalance beyond the four year spend-down of bond proceeds. Fitch believes that, absent working cash bond proceeds, the district’s current reserve levels are sufficient to weather further mild operational imbalances, however, Fitch’s concern lies in the uncertain duration and magnitude of the district’s out-year structural deficits.

BOND PROCEEDS TO SUPPORT NEAR-TERM OPERATIONS

The district intends to deficit spend $12 million of previously issued 2015A working cash GO bond proceeds over the next four years. The planned, short-term utilization of proceeds represents a way for the district to raise taxes by circumventing statutory operational tax rate caps via the district’s unlimited taxing power for GO debt service. The district also restructured existing debt, extending some maturities, to limit the tax impact of the working cash bonds which fully mature by 2019.

The district believes that supporting operations with bond proceeds over the next four years will allow enough time for the district’s tax base to recover and eventually close the budget gap, preserving the district’s financial position and preventing the need for further expenditure cuts. Fitch believes this is an optimistic assessment and remains concerned about the prospects for long-term structural balance between recurring revenues and expenditures.

STABILIZED, INDUSTRIAL ECONOMY

The district’s economy is centered around several industrial entities, as reflected in its highly concentrated tax base (top 10 taxpayers account for 25% of the total tax base). The district’s top two taxpayers (Equistar and Aux Sable), which together account for over 15% of the tax base, have both recently announced expansions of at least $150 million each, although the district expects much of the tax base impact to be abated.

Unemployment rates for Grundy County have historically been above state and national levels, reflecting vulnerability to the industrial component of the economy. For February 2015 the county recorded an unemployment rate of 8.5%, well above the respective state and national rates of 6.5% and 5.8%. Kendall and Will counties, for which the district also serves certain portions, recorded unemployment rates of 6.0% and 7.1% for the same period. District income and wealth levels are above average despite the elevated unemployment.

The district’s tax base posted a 5.8% decline from tax year 2013 to 2014, bringing the 2014 tax base down a cumulative 20% from peak levels in 2010. The district expects tax base stabilization over the next year, which Fitch believes is reasonable given recent trends in the district’s housing market.

MODERATE LONG-TERM LIABILITY BURDEN

The district’s overall debt ratios are high at $4,982 per capita and 5.9% of market value. However, amortization is rapid, the district does not anticipate further borrowing over the near-term, and capital needs are minimal.

The district participates in two state pension plans. The Teachers’ Retirement System is severely underfunded at 40.6% using a 7.5% discount rate, versus an estimated 38.5% using Fitch’s more conservative 7% discount rate. Funding for the Illinois Municipal Retirement Fund is more sufficient. Exposure to other post-employment benefits (OPEB) is limited as it consists of an implicit rate subsidy for retirees.

The district receives funding from the state to make its annual required contributions. Fitch believes that, while not currently envisioned, if this arrangement were to end, it could present significant pressure on district finances. Costs related to debt service and retirement benefits range from 15% to 20% of the district’s total governmental budget in any given year, which Fitch considers moderate.

Additional information is available at ‘www.fitchratings.com‘.

In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and Zillow.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985420

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
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