IL's Aa3 GO Ratings CREDIT OPINION CLIENT SERVICES ...€¦ · The Aa3 GOLT rating reflects the Aa3 GOULT rating and the district's pledge to pay debt service with a dedicated levy

U.S. PUBLIC FINANCE

CREDIT OPINION28 August 2017

Update

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Coley J Anderson [email protected]

Rachel Cortez 312-706-9956VP-Sr Credit Officer/[email protected]

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Cook County School District 162(Matteson), ILUpdate - Moody's Affirms Cook County SD 162 (Matteson),IL's Aa3 GO Ratings

Summary Rating RationaleMoody's Investors Service has affirmed Cook County School District 162 (Matteson), IL's Aa3ratings on $11 million of general obligation unlimited tax (GOULT) debt and $13.6 million ofgeneral obligation limited tax (GOLT) debt. Concurrently, Moody's has upgraded to Aa3 fromA1 the rating on the district's $10.8 million of lease certificates.

The Aa3 GOULT rating incorporates the district’s moderately sized tax base with aboveaverage resident income indices and stable financial profile with healthy reserves. The ratingalso considers the district's above average debt burden and long-term contingent liabilityassociated with participation in the Illinois Teacher Retirement System (TRS).

The Aa3 GOLT rating reflects the Aa3 GOULT rating and the district's pledge to pay debtservice with a dedicated levy that is unlimited by rate but limited by the amount of thedistrict's debt service extension base (DSEB). The DSEB amount provides adequate coverageof GOLT debt service.

The Aa3 lease revenue rating reflects the Aa3 GOULT rating and the district's pledge to makelease payments with all available funds. This pledge is not subject to appropriation.

Credit Strengths

» History of sound operating performance and currently satisfactory reserves

» Elevated resident income indices

Credit Challenges

» Material reliance on the state of Illinois (Baa3 negative) for operating revenue

» Elevated debt burden

» Pension liabilities likely to grow as the district will become responsible for an increasingshare of employee pension costs

Rating OutlookOutlooks are typically not assigned to local government credits with this amount of debt.

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBM_1087995

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Factors that Could Lead to an Upgrade

» Material strengthening of district reserves and available liquidity

» Reduced reliance on the state for operating revenues

» Moderation of the district’s debt burden

Factors that Could Lead to a Downgrade

» Prolonged delays or cuts in state operating aid

» Weakening of operating reserves

» Increased debt or pension burden

Key Indicators

Exhibit 1

Cook County S.D. 162 (Matteson), IL 2012 2013 2014 2015 2016

Economy/Tax Base

Total Full Value ($000) $ 1,370,058 $ 1,268,563 $ 1,152,346 $ 1,077,033 $ 1,033,667

Full Value Per Capita $ 54,549 $ 49,914 $ 44,896 $ 42,376 $ 40,272

Median Family Income (% of US Median) 115.4% 120.5% 122.0% 121.7% 121.7%

Finances

Operating Revenue ($000) $ 44,787 $ 43,910 $ 45,139 $ 46,160 $ 49,948

Fund Balance as a % of Revenues 20.5% 23.3% 26.3% 26.5% 25.9%

Cash Balance as a % of Revenues 18.9% 24.2% 27.9% 27.5% 25.9%

Debt/Pensions

Net Direct Debt ($000) $ 41,444 $ 40,200 $ 39,106 $ 36,431 $ 35,422

Net Direct Debt / Operating Revenues (x) 0.9x 0.9x 0.9x 0.8x 0.7x

Net Direct Debt / Full Value (%) 3.0% 3.2% 3.4% 3.4% 3.4%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) N/A 0.3x 0.3x 0.3x 0.3x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) N/A 1.1% 1.3% 1.3% 1.4%

Source: Audited Financial Statement; US Census; Moody's Investors Service

Recent DevelopmentsSince the district's last credit opinion, audited results for fiscal 2016 have been published and reflect an increase in operating fundreserves of $713,000. Tax base growth of 4.8% in the most recent year increased the district's full valuation to $1.1 billion.

Detailed Rating ConsiderationsEconomy and Tax Base: South suburban Chicago tax base remains well below pre-recession highsDespite recent growth, the district’s tax base remains significantly below pre-recession levels. The district is located approximately 35miles south of Chicago (Ba1 rating under review). Driven by declines in residential values, the district’s tax base declined 41% from 2011to 2016. Tax base growth of 4.8% in the most recent year increased the district’s full valuation to $1.1 billion. However, the overall taxbase trend is weak, as tax base values averaged a 4.6% annual decline over the last five years. Modest tax base growth is expected overthe near-term given appreciation of existing housing values and increased commercial development. Resident income indices are aboveaverage and estimated at 121.7% of the national median. Over the last five years, district enrollment has declined by an average annualrate of 2.9% to its current 2,799. District officials expect enrollment trends to level out over the near to medium term.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 28 August 2017 Cook County School District 162 (Matteson), IL: Update - Moody's Affirms Cook County SD 162 (Matteson), IL's Aa3 GO Ratings


Financial Operations and Reserves: Conservative budgeting should continue to protect against reliance on uncertain stateaidDespite a history of positive operating results, the district remains materially exposed to financial deterioration given its heavyreliance on the state for operating revenue. The district closed each of the last six years with an operating fund (combined education,operations and maintenance, transportation, working cash, IMRF, and debt service funds) surplus driven by conservative budgetarypractices that include budgeting for $400,000 in contingencies each year. The positive operating results drove increases in operatingreserves from $8.7 million and 22.5% of operating revenue in fiscal 2011 to $12.9 million and 25.9% of operating revenue at the closeof fiscal 2016.

For fiscal 2017, the district expects to close the year with an operating deficit of $400,000, assuming no additional state funding isreceived. The shortfall was primarily driven by declines in state revenue and significant increases in tax refunds. The district is currentlyowed $700,000 and $500,000 in categorical and early childhood grants, respectively, from the state of Illinois. Additionally, propertytax refunds surged from $500,000 to $1.7 million in fiscal 2017. Further property tax refunds are not expected.

State aid, including on behalf pension payments, was a substantial 43.1% (26% net of on behalf) of operating revenue in fiscal 2016.The state's fiscal 2018 budget ties school funding to the state's adoption of an “evidence based” funding model. Until such a bill isenacted, school districts will not receive the revenue that was appropriated in the new state budget. Illinois districts normally receivetheir first state aid payment in August. Given the district's dependence on state operating revenue, a prolonged disruption in fundingcould pressure the district's finances.

LIQUIDITYDistrict liquidity is currently ample; however, prolonged delays in state aid distribution will likely require the district to utilize someform of cash flow borrowing. At the close of fiscal 2016, net cash across district operating funds was $12.9 million and 25.9% ofoperating revenue. If delays in state funding extend until January 2018, management expects it will need to utilize tax anticipationwarrants to sustain district operations.

Debt and Pensions: Elevated debt burden; pension costs will likely growThe district’s debt burden is high but should not grow further given a lack of near-term borrowing plans and healthy principalamortization. At 3.4% and 7.1%, the district’s direct and overall debt burdens are above average. When compared to operating revenue,the district’s direct debt burden is more moderate at 0.7 times. The district has no immediate plans for additional debt as officialsexpect to address modest capital needs on a pay-go basis. The district allocates $500,000 in annual capital spending out of itsoperating budget.

The three-year average Moody’s adjusted net pension liability (ANPL), our measure of a local government’s pension burden, for thedistrict totals $14.9 million or 0.3 times operating revenue and 1.4% of full valuation. The current liability reflects the fact that thestate currently has primary responsibility for funding teacher pensions. Fixed costs (combined debt service, pension and other post-employment benefit expenditures) were a manageable 9.8% of operating revenues.

DEBT STRUCTUREAll of the district’s debt is fixed rate and long-term. Amortization of existing debt is healthy with 88% of principal set to be retiredover the next ten years. The district's DSEB provides adequate coverage on outstanding GOLT DSEB debt assuming annual CPI growthof 2%. Should CPI not grow at the projected rate, management intends to use cash on hand to cover any shortfalls. Management'sconservative financial practices, including annual budgetary contingencies of $400,000, would enable the district to cover any suchshortfalls.

DEBT-RELATED DERIVATIVESThe district has no derivative exposure.

PENSIONS AND OPEBThe state has primary responsibility for funding teacher pensions through payments made on behalf of school districts. Districtteachers participate in the Teachers Retirement System (TRS) of Illinois, a multi-employer defined benefit pension plan. Non-teachingdistrict employees participate in the Illinois Municipal Retirement Fund (IMRF), an agent multi-employer plan. The state's fiscal 2016contribution to TRS was just 69% of the amount needed for the plan to tread water.1 Based on current funding practices, we expect



unfunded liabilities of TRS on both a reported and Moody's-adjusted basis to grow, necessitating further growth in state contributions.The district’s contribution to IMRF was stronger at 137.6% of tread water.

In July 2017, the state shifted responsibility for new employees’ pensions to schools districts in order to provide itself with budgetaryrelief under its statutory pension funding approach. While limited for now, the impact of this change will increase as employees hiredafter the change grows to comprise a greater portion of district staff. Districts are responsible for the entire accrued liability associatedwith employees hired starting in fiscal 2018, meaning they must backfill any unfunded liabilities associated with these employees thatmaterialize in the future if pension assets do not preform as projected. Unless it acts to shift costs further, the state of Illinois retainsresponsibility for the bulk of pension costs associated with employees hired previously.

Management and Governance: Moderate Institutional FrameworkIllinois school districts have an Institutional Framework score of A, which is moderate. Institutional Framework scores measure asector's legal ability to increase revenues and decrease expenditures. School districts have moderate revenue-raising ability since theyare subject to tax caps, but districts can seek voter approval for additional local property tax funding. Revenue predictability is disparateacross the state: revenues for property tax dependent districts are very stable, while revenues for state aid dependent districts are lessstable. Strong public sector unions somewhat limit districts’ expenditure reduction ability. Still, districts have some cost-cutting abilitygiven manageable fixed costs, as the state currently assumes most pension costs. Expenditures consist primarily of personnel costs,which are highly predictable.

Property taxes comprised 46% of the district's fiscal 2016 operating revenue. The district is near the statutory maximum tax ratesacross district operating funds. The district is also subject to the Property Tax Extension Limitation Law (PTELL), according to whichthe district’s operating property tax levies can grow no more than the lesser of 5% or growth in the consumer price index, plus newconstruction.

Legal SecurityThe district's GOULT debt is secured by a dedicated property tax levy, unlimited as to rate and amount.

The district's GOLT debt is secured by a dedicated property tax levy, unlimited as to rate, but limited as to the amount of the district'sDSEB.

The district's lease certificates are secured by the district's pledge to make lease payments from any and all available funds. This pledgeis not subject to annual appropriation.

Use of ProceedsNot applicable.

Obligor ProfileLocated approximately 35 miles south of Chicago, the district serves the villages of Matteson, Olympia Fields, Park Forest, Richton Parkand University Park. As of 2016, district enrollment totaled 2,799 and has declined by an annual average rate of 2.9% over the last fiveyears.

MethodologyThe principal methodology used in the general obligation rating was US Local Government General Obligation Debt published inDecember 2016. The principal methodology used in the lease rating was Lease, Appropriation, Moral Obligation and Comparable Debtof US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copyof these methodologies.

Endnotes1 Our “tread water” indicator measures the annual government contribution required to prevent reported net pension liabilities from growing, given the

entity's actuarial assumptions. An annual government contribution that treads water equals the sum of employer service cost and interest on the reportednet pension liability at the start of the fiscal year. A pension plan that receives an employer contribution equal to tread water will end the year withunchanged net pension liability relative to the beginning of the year if all plan assumptions hold. Net liabilities may decrease or increase in a given yeardue to factors other than the contribution amount, such as investment performance that exceeds or falls short of a plan's assumed rate of return. Still,higher contributions will always reduce unfunded liabilities faster, or will allow unfunded liabilities to grow more slowly than lower contributions.



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Contacts

Coley J Anderson [email protected]

Rachel Cortez 312-706-9956VP-Sr Credit Officer/[email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


Documents

IL's Aa3 GO Ratings CREDIT OPINION CLIENT SERVICES ...€¦ · The Aa3 GOLT rating reflects the Aa3 GOULT rating and the district's pledge to pay debt service with a dedicated levy