Fitch Ratings assigns an 'AA-' to the Springfield Metro Sanitary District, Illinois' (the district) $38.4 million (subject to change) taxable general obligation (GO) bonds (Alternate Revenue Source), series 2009E (Build America Bonds-Direct Payment), which are scheduled for a negotiated sale on Oct. 14, 2009. Fitch also affirms the 'AA-' rating on the district's $18.8 million in outstanding GO alternate revenue bonds, series 2009A and implied 'A+' rating to the district's anticipated sale of senior lien sewer revenue bonds, likely to be issued in the spring of 2010. The Rating Outlook is Stable.
The GO alternate revenue source bonds are valid and binding obligations and are payable from net revenues of the district after payment of debt service of senior lien sewer revenue bonds and from ad valorem taxes levied against all taxable property within the district without limitation as to rate or amount. Proceeds will pay a portion of the costs for a new treatment plant and facilities upgrade at the district's Spring Creek site; pay interest on the 2009E bonds through Feb. 25, 2012; and pay costs of issuance. While the 2009A and 2009E bonds are junior to sewer revenue bonds, the higher rating reflects the stronger unlimited property tax pledge for bond repayment.
The 'AA-' rating on the GO bonds reflects the strength of the service territory's tax base and economy, the district's independent ability to set rates, and projected limited, if any, property tax support for the current and future GO bond debt service. The district is embarking on a major expansion program, and rates will rise significantly to accommodate future debt and loan issuances. Credit risks include the magnitude of the district's capital plan and some uncertainty with regard to the combined sewer overflow program, historically mixed financial performance, slow amortization of GO bonds, and low pension funding ratio.
The district was organized in 1924 and is located in central Illinois in Sangamon County (the county), serving a population of approximately 147,000. The district is governed by a five-member board appointed by the county board chairman and confirmed by the county board of supervisors. Daily operations are administered by the Director/Engineer. The service area of the district includes nearly 80% of the county's taxable values. About two-thirds of the district is within the city of Springfield (the state capital), and the boundaries also include several nearby villages and unincorporated areas.
In addition to sole rate setting ability, credit strength is derived by the irrevocable contract provisions set by the state Sanitary Act, which does not allow participating members to disconnect as long as any revenue or GO bonds are outstanding. In addition, officials report that potential exists for adding customers to the district, through annexations of existing communities as well as planned subdivisions in and around Springfield.
The district's tax base continues to experience growth. Average annual gains in taxable value from 2003-2009 were 4.5%, although more modest increases were recorded in 2009 and 2010. In addition to economic expansion, growth in taxable values reflects annexations which have added $11 million since 2003. While not immune to the state and national recession, housing data indicates relatively low delinquency and foreclosure rates for the area. Economic stability is enhanced by the large government, health care, and university presence. County unemployment rates remain well below state and national averages. Wealth indicators are also below state and national norms.
In June 2005, the district was notified by the Illinois Environmental Protection Agency (IEPA) that its Spring Creek and Sugar Creek treatment plants were operating in excess of rated design capacity. Officials acted quickly and were successful in having both plants re-rated by the IEPA on the condition that the district would prepare facility plan studies on the system. Upon completion of those studies, a new plant to replace Spring Creek was approved. Construction for the four-phased project began in September 2009, with final completion expected in April 2013. Construction bids for phase I and II were favorable, coming in $11.3 million (or 18%) lower than design estimates. In addition, the district recently signed a loan agreement with the IEPA for $20 million to help fund Spring Creek plant construction; $15 million is structured as a 0% interest loan, with the remaining $5 million to be forgiven. The balance of the $135.4 million in project financing costs will be funded from a $34.6 million senior revenue bond issuance scheduled for spring 2010 and $40 million in anticipated low-interest IEPA loans. In addition, expansion of the Sugar Creek plant, estimated to cost $50 million, is anticipated to begin sometime in 2013 or 2014. Once completed, the design capacity for Spring Creek and Sugar Creek plants will increase by 60% and 50%, respectively.
While completing a capital program of this magnitude may pose a challenge, the district has a good history of completing large projects on time and within budget as well as working closely with the IEPA, environmental groups, and the community to develop and implement the project. Rates will be raised by 400% over the next seven years, although they are expected to remain affordable and competitive with surrounding utilities. However, some uncertainty remains with the treatment of combined sewer overflow (CSO), a problem the district shares with over 100 utilities in the state. The district has adopted a strategy to address this issue, including funding a $4.7 million CSO study with a portion of the 2009A bond proceeds, and believes that resolution of this issue, while still unclear, is still manageable. Payout on GO bonds is very slow due to the current offering, which matures in 2049, although the 2009E bonds are subject to a mandatory redemption provision.
Financial performance, particularly the last three fiscal years, has been mixed, reflecting a reluctance by the prior administration to raise rates, as well as wetter than normal weather (fiscal years 2007 and 2009), and a $1.7 million prepayment expense in fiscal 2008 associated with an early retirement program. Financial results for 2009 showed a 1.1 times (x) all-in debt service coverage and a modest 75 days cash on hand. The unrestricted net asset position was a negative $1.6 million due to the 2008 pension liability prepayment.
Financial projections, based on reasonable assumptions and adopted rate increases, indicate annual improvement to cash position and debt service coverage. In fiscal 2014, aggregate debt service coverage, including senior (revenue bonds), junior (GO bonds), and subordinate lien (IEPA loans) increases to 1.6x. Senior lien coverage is projected to be 5.5x and combined senior and junior lien coverage at 2.6x. Unrestricted days cash on hand (which includes operating and capital funds) is projected to grow to 372 days.
The district participates in the state's retirement system for its 43 employees and continues to make its full annually required contribution (ARC). Between 2005 and 2007, just over one-fourth (11) of the district's employees took early retirement, reducing the funded ratio from 84.1% in 2004 to 38.4% in 2007, although the district did realize some cost savings as a result of the program. As of Dec. 31, 2008, the district's funded ratio declined to a very low 11% (or in absolute terms, a more manageable unfunded accrued liability of $4.6 million) reflecting the state retirement system's nearly 25% investment loss as well as the district's small number of employees. While of concern, officials have stated that they will continue to make their full ARC to the plan and have projected increasing ARC payments.
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