Fitch has assigned an 'AA' rating to the City of Chicago, Illinois' general obligation bonds as follows:
--$594,475,000 project and refunding series 2007A;
--$20,000,000 taxable series 2007B.
Fitch also affirms the 'AA' rating on $5.9 billion of outstanding GO bonds. The bonds are expected to price May 1 through a syndicate led by Merrill Lynch & Co. The city's full faith and credit pledge backs the bonds. About $248 million of the 2007A bonds will refund outstanding debt and the remainder will finance a variety of neighborhood infrastructure projects, transportation improvements, municipal building improvements and equipment purchases. The 2007B taxable bonds will finance court judgments. The Rating Outlook is Stable.
The 'AA' rating reflects Chicago's diverse economy with limited volatility, improved financial performance and position, and improved financial flexibility due to the establishment of sizable financial reserves. The improved financial position is associated with the sale of the Chicago Skyway concession ($1.8 billion), which enabled debt reduction and the formation of long-term budgetary reserves. The new budgetary reserves include a $500 million perpetual reserve fund and a $375 million mid-term reserve fund, both of which will produce steady interest income streams. As the city maintained its reserves, it countered cyclical weakness in tax growth with sales tax increases, personnel reductions, and broad-based cost-cutting. All labor bargaining groups have renewed their contracts which expire June 2007.
Chicago has experienced less growth volatility as the service sector expanded at a faster pace than manufacturing. While manufacturing remains a vital component in the city's makeup, its size more closely resembles national industry distribution. Underlying the stability of total citywide employment is a shift in recent years toward service jobs as manufacturing declined. Nevertheless, after a period of steady employment growth, city unemployment rates increased from a previous low of 5.5% in 2000 to 8.2% in 2002. The combination of labor force declines with stable employment levels subsequently lowered the unemployment rate to 7.0% in 2005. More recently, the rate, unadjusted for seasonality, decreased to 5.5% in January 2007, from 6.4% in January 2006.
The city achieved its long-term record of financial stability by strong economic growth and limiting overall budget growth to inflationary rates. The property tax base has grown 6.9% annually since 1995. As property tax levies grew moderately, the city implemented various user charges to capture consumption-based economic activities. Nevertheless, as a home rule city, Chicago has enhanced its revenue-raising flexibility with continued economic growth: since 1995, property values have grown 11.3% annually and residential construction remains strong.
With economic broadening and a diverse tax revenue stream supporting a stable financial picture through 2002, as general fund reserves represented 5.6% of expenditures, weaker economic growth in 2003 reduced the reserves to 2.3%. The administration responded promptly to potential shortfalls by making significant expenditure reductions, including a hiring freeze, personnel reductions, and broad-based programmatic cuts. Although tight budget conditions continued through 2005, reduced spending enabled a general fund surplus which increased the general fund reserve to $110.8 million in 2005, or 4% of expenditures. Increased city sales tax (0.25%) and hotel tax (0.5%), combined with better-than-expected results in sales, income and transactions taxes, helped lift general fund reserves in 2005.
Preparing for compliance with Governmental Accounting Standards Board Statement 45 for retiree health care benefits, actuaries have calculated that the preliminary liability as of December 2006 will not exceed $1.4 billion. The estimate reflects an existing settlement with its retired employees to pay a portion of the city's defined benefit health care plan, which expires June 30, 2013. Since the accounting standard is not required until fiscal 2007, the city administration has not developed a financing plan.
While using both internal and external financing resources, the city has kept its debt burden stable. Direct debt equals $2,228 on a per capita basis and 2.4% of property market values; including the debt of the Chicago Board of Education and other overlapping entities, total debt equals $4,951 per capita and 5.4% of property market values. Future tax-supported debt is expected to be modest as city enterprises continue to raise capital supported by user fees and non-property-tax sources. Chicago's four defined-benefit pension plans combined are funded at 61% of liabilities at historical cost through December 2005.
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