Correction: Fitch Downgrades Skokie, IL's GO Bonds to 'AA+'; Outlook Revised to Stable

(This is a correction of a press release originally published April 28, 2016 to add reference to Fitch's revised U.S. Tax-Supported Rating Criteria.)

Fitch Ratings has downgraded the Issuer Default Rating (IDR) on the Village of Skokie, Illinois to 'AA+' from 'AAA'.

In addition, Fitch assigns an 'AA+' rating to the following bonds:

--$9.2 million taxable general obligation (GO) refunding bonds, series 2016A bonds.

Fitch downgrades the rating on the following bonds:

--$59 million GO bonds to 'AA+' from 'AAA'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are general obligation of the village backed by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

The downgrade to 'AA+' from 'AAA' reflects implementation of Fitch's revised U.S. Tax-Supported Rating Criteria. Under the revised criteria, Fitch assesses four key rating factors, informed by the economic base. Assessment of these four rating factors supported a rating in the 'AA' category.

Economic Resource Base

The village is an affluent residential community in close proximity to Chicago with a strong commercial and industrial presence. Additionally, the local economy has a large retail presence with three large shopping centers and four major hotels and significant ongoing development of new stores and restaurants.

Revenue Framework: 'aa' factor assessment

The village benefits from strong revenue-raising flexibility given its home rule status. Fitch's expectations for revenue growth prospects are tempered by significant assessed property valuations declines that have just started to stabilize in 2015. Sales tax revenue growth has been sound.

Expenditure Framework: 'aa' factor assessment

Fitch expects the natural trend of expenditure growth to be moderate relative to revenue growth. Flexibility to reduce spending is adequate given labor pressures.

Long-Term Liability Burden: 'aa' factor assessment

Debt and pension are moderate, accounting for 11.6% of person income.

Operating Performance: 'aaa' factor assessment

The village has demonstrated significant financial resiliency and has maintained strong financial flexibility including healthy general fund reserves by implementing new recurring revenue sources to maintain strong financial results.

RATING SENSITIVITIES

The village's credit rating is sensitive to maintaining sound financial flexibility and fully funding its actuarially-required pension payments.

CREDIT PROFILE

The village is an affluent residential community in close proximity to Chicago with a strong commercial and industrial presence. It has a major retail and commercial center including several large industrial areas encompassing approximately 250 businesses. The village has above average wealth levels with median income approximately 140% of the state and U.S. Its February 2016 unemployment rate of 5.6% is lower the state's 6.8% rate but higher than the nation's 5.1% rate.

Revenue Framework

Revenue growth is expected to continue to exceed the level of inflation but remain below U.S. economic growth based on the trend of modest growth over the past 10 years. After a large 39% decline in equalized assessed valuations (AV) from 2010 through 2014, the village had a modest 2.57% increase in AV in 2015. Sales tax collections increased by 11.6% from the prior year due to an increase in the home rule sales tax rate to 1.25% from 1% and new economic activity including the opening of a new Wal-Mart and other retail businesses.

The village is a home rule municipality and is not subject to the state's Limitation Law and has used this flexibility to implement local-option revenue sources including the Home Rule sales tax which was implemented in 1991 at a rate of 0.75%. Additionally, the village implemented the Municipal Utility Tax in 2010 to address the rising cost of pensions and has been entirely dedicated to funding the village's pension plans. Revenues are expected to increase by $3 million (5% of general fund revenue) in fiscal 2016 due to other policy actions including a one-cent natural gas tax increase per therm and a new 2% food and beverage tax on gross receipts from prepared foods.

Expenditure Framework

Fitch expects the village's pace of spending growth to be similar to that of revenue growth.

Carrying costs are manageable at 20.4% of governmental spending in fiscal 2015. This includes rapid amortization of 81% in 10 years. The village had a prior history of underfunding its total annual actuarial required pension contributions however recently increased funding levels to the pension funds. Management plans to continue increasing funding levels to the two funds until they reach the actuarially-required level. The village funds its other post-employment benefits (OPEB) on a pay as you go basis and the implicit subsidy for benefits results in a low unfunded actuarial liability of $10.5 million as of April 30, 2015.

Labor relations are governed by collective bargaining agreements which provide management moderate control over labor costs. Management has the ability to control headcount to manage employee salary and benefit cost and utilized hiring freezes to reduce expenditures rather than laying off employees.

Long-Term Liability Burden

The village's long-term liability burden is moderate, with debt and pension liabilities equivalent to 11.6% of personal income. Overall debt is 4.8% of full value and the net pension as a percentage of market value is 2.1%.

The village manages two pension plans for police and fire and participates in the state's municipal retirement plan. The police and fire pensions are poorly funded with actuarial accrued assets as a percentage of the total liability of 69% and 57%, respectively. The Illinois Municipal Retirement pension asset-to-liability ratio is 84%.

The village's implicit rate subsidy for OPEB results in a low unfunded actuarial liability of $10 million, or 0.20% of market value as of April 30, 2015.

Operating Performance

Inherent budget flexibility is high given the village's status as a home rule municipality and ability to manage main line expenditures. General fund reserves are well above the level Fitch believes provides an adequate minimum reserve safety margin, with a fiscal 2015 ending fund balance equivalent to over 25% of general fund expenditures. Given the ample reserves, strong financial policies and significant legal revenue-raising ability, Fitch expects the village to maintain strong financial operations.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003693

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003693

Endorsement Policy

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

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