Fitch Ratings takes the following rating action on Harvey, Illinois' series 2007 A&B general obligation (GO) refunding bonds as part of its continuous surveillance effort:
--Approximately $30 million GO bonds, series 2007A and series 2007B (taxable), downgraded to 'B' from 'BBB-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The downgrade reflects the dramatic increase in the city's already large accumulated general fund deficit and unsuccessful attempts by management to date in addressing fiscal stability.
--Fitch believes measures to eliminate operating deficits and reverse fund balance declines are now more difficult given the weakness in the economy.
--The city lacks timely, clear disclosure of financial activities.
--Recessionary pressures coupled with Harvey's manufacturing and transportation-based economy have contributed to the city's high unemployment rate and below-average wealth indicators.
--Harvey's role as a transportation hub has led to historic growth in taxable values, although Fitch expects the tax base may shrink in coming years, as the city has a high degree of subprime mortgage exposure and limited development activity.
--Overall and direct debt is high as a percent of property value.
KEY RATING DRIVERS:
--A meaningful change in the size of the accumulated deficit could result in a rating change.
--Improved financial management and disclosure could result in an improved rating.
SECURITY:
The series 2007 A&B bonds are general obligation refunding bonds, backed by the city's full faith and credit pledge, payable from unlimited ad valorem taxes levied on all taxable property within the city. All collections of ad valorem property taxes levied by the city for corporate purposes, including to pay debt service on the bonds, are directly deposited by Cook County into a tax escrow account as permitted by Illinois Statute.
CREDIT SUMMARY:
Harvey is located about 22 miles south of downtown Chicago and benefits from its position along major interstates and commuter lines. Several economic projects to expand Harvey's role as a Midwest transportation hub that may spur job creation and economic development have not yet been realized. Wealth indicators are well-below average, with per capita money income 51% of the state and 53% of the national level and the poverty rate nearly 30%. The city's unemployment rate as of December 2009 was a very high 16.4%, up from 11.5% a year ago and well-above the current state and national unemployment rates of 10.8% and 9.7%, respectively.
Harvey's financial position was weak even before the current recession. Expected improvement in financial performance did not materialize; rather the city's fiscal picture has deteriorated significantly in the past several years. Poor spending controls and a history of overspending have exacerbated a growing general fund deficit. A paucity of financial expertise has resulted in late and qualified audits, limiting clarity in fiscal disclosure, which Fitch believes has reduced effective budgetary management. The city has retained a financial consultant in an effort, according to city officials, to improve accounting practices. Harvey ended fiscal 2008 with an unreserved general fund deficit of $9.1 million or -18% of spending; however, this includes bond proceeds, without which, results would have been consistent with the fiscal 2007 unreserved general fund deficit of -40% of spending. Despite nearly $2 million in expenditure reductions, unaudited fiscal 2009 estimates indicate the general fund balance again declined by about $1 million, bringing the accumulated deficit to $10 million or about -40% of spending.
Year-to-date, fiscal 2010 revenues are down about 15-20% from fiscal 2009 levels, according to city management. To help offset declining tax revenues, the city is imposing several additional taxes and fees, including fuel and liquor taxes, effective Jan. 1, 2010. Additionally, the city is limiting spending, including a freeze on new hiring and capital expenditures, to attempt to better align current spending with revenue declines. According to the city's financial consultant, total expenditure cuts in fiscal 2010 are commensurate with revenue declines. However, Fitch remains concerned, as previous expectations for financial stabilization were not realized. Fitch expects the city to continue to face significant challenges as management struggles to align spending with dramatic revenue declines before even beginning to address the unsustainable accumulated deficit.
The overall debt burden is moderate on a per capita basis at $2,617 but a high 8% of market value. Amortization of general obligation debt is below average with only 31% of the debt retired in the next ten years. The city is working to develop a CIP, but does not anticipate issuing additional debt in the near future.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Tax-Supported Rating Criteria,' dated Dec.21, 2009;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at 'www.fitchratings.com'.
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Contacts:
Fitch Ratings, Chicago
Dana N. Sodikoff, 312-368-3215
Melanie
A.J. Shaker, 312-368-3143
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com