City of Evanston Maintains Bond Ratings
City of Evanston Maintains Aa2 from Moody’s and AA+ from Fitch Rating Services
To finance a portion of the City of Evanston’s annual capital improvements plan and purchase major equipment with extended lifecycles, the City issues general obligation bonds. For 2017, the City is issuing $14.5 million in new general obligation Bonds. The sale date for these bonds is September 28, 2017. The City is also issuing $9.7 million in general obligation bonds to refinance bonds issued in 2007. The City is projected to save $913,000 in interest costs through this refinancing. The City is also issuing $5.0 million in taxable general obligation bonds to refinance two letters of credit in the Dempster Dodge TIF district and the Chicago Main TIF district. As a part of this issuance process the bonds must be rated for their credit worthiness. Both Moody’s and Fitch have affirmed the City of Evanston’s current bond rating.
Below are summaries of the two separate reviews conducted by national ratings agencies on the City’s financial position and subsequent rating for these bonds. The full reviews can be found at each rating agency’s web site and at www.cityofevanston.org/financereports.
General Obligation Corporate Purpose Bonds, Series 2017 Aa2
Sale Amount $29,200,000
Opinion - September 20, 2017
Summary Rating Rationale
Moody's Investors Service has assigned a Aa2 rating to the City of Evanston, IL's $14.5 million General Obligation Corporate Purpose Bonds, Series 2017A, $9.7 million General Obligation Refunding Bonds, Series 2017B, and $5.0 million Taxable General Obligation Corporate Purpose Bonds, Series 2017C. Moody's maintains the Aa2 on the city's outstanding general obligation unlimited tax (GOULT) debt. With the current sale, the city has $163.6 million of GOULT bonds outstanding, all of which is rated by Moody's.
The Aa2 rating reflects the city's strong economic profile characterized by a large tax base anchored by Northwestern University (Aaa stable) and an affluent residential profile. The rating also incorporates the city's satisfactory financial position supported by broad legal flexibility to raise local taxes, and its high pension and fixed cost burdens.
» Higher education and health care institutions anchor an affluent and diverse tax base that plays a key role in the Chicago (Ba1 negative) regional economy
» Significant financial flexibility afforded by the city's status as a home rule unit of local government
» Cash and fund balance relative to operating revenue is modest compared to similarly rated entities
» Elevated pension and fixed cost burdens.
Factors that Could Lead to an Upgrade
» Moderated debt, pension and fixed cost burdens
» Significant growth in fund balance and liquidity
Factors that Could Lead to a Downgrade
» Narrowed fund balance or liquidity
» Growth in the city's debt or pension burden
Fitch Ratings-New York-21 September 2017:
Fitch Ratings has assigned a rating of 'AA+' to the following Evanston, IL general obligation (GO) bonds:
--$14.5 million GO corporate purpose bonds series 2017A;
--$9.6 million GO refunding bonds series 2017B;
--$5 million taxable GO corporate purpose bonds series 2017C.
As part of the same action, Fitch has affirmed the following ratings at 'AA+':
--the city's Long-term Issuer Default Rating (IDR);
--the city's $143 million of GO bonds outstanding.
The Rating Outlook is Stable
Proceeds of the series 2017A bonds will be used to finance capital projects outlined in the city's capital improvements plan, the proceeds of series 2017B are being used to currently refund the city's series 2007 GO bonds, and proceeds of series 2017C will be used to provide long-term financing for infrastructure improvements in two of the city's TIF districts. The bonds will be sold competitively on Sept. 28, 2017.
Evanston's 'AA+' IDR and GO ratings incorporate the city's strong independent revenue-raising ability, moderate long-term liability burden, and robust financial flexibility. The ratings also incorporate Evanston's somewhat uneven general fund operating performance since the 2009 recession, which reflects a trade-off between management's desire to preserve service levels and increase annual pension funding, while insulating residents from significant tax increases. The administration has kept up with necessary capital spending since the last recession and has improved its funding of annual pension contributions, but general fund reserves have declined, albeit to still-healthy levels.
Economic Resource Base
The city is contiguous with Chicago and is approximately 13 miles from downtown. The strong local economy is anchored by Northwestern University, which employs over 7,000 people and educates approximately 21,000 students at its Evanston campus. Additionally, NorthShore University Healthcare and St. Francis Hospital, with 4,100 and 1,000 employees, respectively, provide additional employment and economic stability to the city. Evanston's 2016 population was estimated at about 74,800.
Key Rating Drivers
Revenue Framework: 'aa'
Fitch expects that the city's revenue growth pattern will continue to be slow, roughly even with inflation. The city's independent legal ability to raise revenue is exceptionally strong given its status as an Illinois home rule municipality.
Expenditure Framework: 'a'
Fitch anticipates that the city's natural rate of expenditure growth will be above its revenue growth rate. The city retains adequate spending flexibility pertaining to service delivery, head count and capital spending, but fixed carrying costs for debt service and retiree benefits are presently elevated, totaling approximately 30% of governmental expenditures in fiscal 2016.
Long-Term Liability Burden: 'aa'
Evanston's long-term liability burden, inclusive of its net overall debt and unfunded pension liabilities, is very moderate compared to its economic resource base, equaling 12% of personal income.
Operating Performance: 'aaa'
The city maintains exceptionally strong gap-closing capacity, and Fitch believes the city would manage successfully through a moderate cyclical downturn while maintaining solid financial flexibility. Available reserves, including unrestricted deposits held outside the general fund, equaled 20% of spending in fiscal 2016 - a healthy fiscal cushion, albeit lower than pre-recession levels.
FINANCIAL FLEXIBILITY: Failure to maintain adequate financial flexibility, primarily from further material erosion of operating reserves, could place negative pressure on the rating.
HIGHER FIXED COSTS: Further increases to already high carrying costs for debt service and annual employee benefits could also place negative pressure on the rating.
Details of the City’s Credit Profile from Fitch can be found in the full report at www.cityofevanston.org/financereports