NEW YORK--(BUSINESS WIRE)--In the course of routine surveillance, Fitch Ratings downgrades Lake Zurich Community Unit School District No. 95's (the district) approximately $42.2 million in outstanding school building bonds to 'AA-' from 'AA+'. The Rating Outlook is Stable.The downgrade is based on the substantial erosion in reserves from the very high levels seen previously. This decline was the result of pay-as-you go capital spending without significant growth in revenues, a slowdown in economic growth and enrollment declines over the last several years that are expected to continue. The revised 'AA-' rating considers the district's improvement in adoption of GAAP basis accounting, financial operations, satisfactory reserves even after sizable drawdowns, above-average income levels, moderate debt burden, and manageable future capital needs.
The district is located in Lake County, whose economy is centered on services, manufacturing and retail trade. Economic indicators are mixed; while personal income levels are above-average relative to the state and the nation, the unemployment rate has recently increased and now exceeds the nation's. The Stable Outlook reflects Fitch's expectation of continued financial stability despite continuing enrollment declines.
The district serves about 36,000 residents primarily of Lake Zurich Village, in a suburban area approximately 37 miles northwest of downtown Chicago, IL. With approximately 6,036 students in 2008, enrollment has declined on average 1.1% annually in the past six years, due to the district's mature development stage and the impact of declining national birth rates. As a result, the district projects losing approximately 50 to 60 students per year. The district will address enrollment declines in the near term by closing one of its schools, thereby generating substantial savings for the district in maintenance and capital repairs.
The district has employed three different auditors in the last five years, which makes tracking changes in the district's financial profile difficult. However, it is evident that the district's financial condition weakened considerably through 2006, exemplified through unreserved educational fund balances of approximately $431,000 or .8% of expenditures in fiscal 2006. Since then the district's financial position has improved with unreserved educational fund balances increasing to $1.3 million and $4.4 million, or 2.4% and 7.6% of expenditures in fiscal 2007 and 2008, respectively. As there is some flexibility between the educational and operations and maintenance (O&M) funds, it is important to note that the district demonstrates a satisfactory unreserved level of 12.5% of expenditures for fiscal 2008 when both funds are aggregated.
Audited fiscal 2008 results indicate a $3.2 million surplus for the educational fund evidencing the district's successful implementation of pro-active financial management policies geared toward increasing the educational fund balance and reserves. The district has reduced labor costs through contractual agreements limiting the amount of annual salary increases for its employees for the next 5 years. In addition, the district has reduced health care costs through increases in prescription drug and office visit co-payments for its employees. The district has also improved its budgeting process enabling stronger oversight through accurate future revenue and expenditure estimates.
While the educational fund balance is improving, the district is also focused on increasing reserve levels for the O&M fund by maintaining a stable tax rate in the O&M fund and simultaneously adjusting the educational fund rate as well as other rates to compensate for the effects of the Illinois property tax extension limitation law (PTELL). The district anticipates that the adjustment in tax rates for the O&M fund will result in an additional $3 million for the O&M fund in fiscal 2009 and $1.5 million in subsequent years designated for capital repairs.
The district does not have any near-term plans to issue additional debt and will continue to fund short-term capital needs on a pay-as-you-go basis. The district's direct debt levels equal a moderate $1,944 per capita and 1.37% of market value. Issuance by overlapping jurisdictions results in an overall debt burden equal to $3,706 per capita and 2.6% of market value.
Note: Fitch issued an exposure draft on July 31, 2009 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'). At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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