Evanston (City of) IL

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1 CREDIT OPINION Evanston (City of) IL New Issue - Moody's Assigns Aa2 to Evanston, IL's GO Bonds New Issue 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 million of GOULT bonds outstanding, all of which is rated by Moody's. Contacts Shannon Bibby Associate Analyst shannon.bibby@moodys.com Alexandra S. Parker MD-Public Finance alexandra.parker@moodys.com Matthew Butler VP-Senior Analyst matthew.butler@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA 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. Credit Strengths 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 Credit Challenges Cash and fund balance relative to operating revenue is modest compared to similarly rated entities Elevated pension and fixed cost burdens Rating Outlook Outlooks are usually not assigned to local government credits with this amount of debt. 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

2 Material tax base contraction or a weakened socioeconomic profile Key Indicators Exhibit 1 Evanston (City of) IL Economy/Tax Base Total Full Value (000) 8,190,293 Full Value Per Capita 109, , % 114,677 Median Family Income (% of US Median) 7,551,416 6,611,703 6,740,450 6,594,659 87,826 89,156 87, % 159.0% 158.9% 158.9% 120, , , ,422 Finances Operating Revenue (000) Fund Balance as a % of Revenues 34.1% 29.0% 27.6% 21.1% 18.2% Cash Balance as a % of Revenues 26.0% 22.0% 15.8% 14.2% 13.9% Debt/Pensions Net Direct Debt (000) Net Direct Debt / Operating Revenues (x) Net Direct Debt / Full Value (%) 142, , , , x 1.1x 1.1x 1.1x 126, x 1.7% 1.8% 2.0% 1.9% 1.9% Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 2.4x 2.5x 2.5x 2.8x 3.0x Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 3.4% 3.9% 4.7% 5.1% 5.8% The above chart reflects data at the end of fiscal year Source: Moody's Investors Service, Evanston's audited financial statements, US Census Bureau Detailed Rating Considerations Economy and Tax Base: Sizable tax base bolstered by institutional presence We expect the city's economic profile will remain robust and continue to be a credit strength. Evanston is home to Northwestern University (Aaa stable), the city's top employer with more than 7,000 employees. In addition to higher education, healthcare is an anchor of the city's economy. North Shore University HealthSystem (Aa2 stable) and St. Francis Hospital employ over 4,000 and 1,000, respectively. Interstate 94, rapid transit, and commuter rail stations provide residents easy access to employment throughout the Chicago region. The city's tax base is large with a full valuation of 8.0 billion. After falling a cumulative 33% from 2011 through 2014, the city's full valuation grew over 21% in the most recent three years. Despite university students accounting for more than 10% of the city's population, per capita income, median family income, and median home value of Evanston residents consistently exceeds state and national levels. As of 2015 median family income in Evanston was estimated at 158.9% of the national median. Nearly 80% of the city's assessed valuation is classified as residential though valuation figures do not include the substantial tax exempt property in the city. Financial Operations and Reserves: Satisfactory financial position supported by revenue raising flexibility Evanston's financial position remains supported by a high degree of revenue raising flexibility despite fund balance and liquidity being more limited than similarly rated local governments. The city closed fiscal 2016 with a general fund surplus of 963,000, which was supported by growth in building permit revenue. Available fund balance across major operating funds in fiscal 2016 was 23.0 million or a satisfactory 18.2% of revenue. We consider the general, debt, emergency telephone system, economic development, and general assistance funds as major operating funds. Although the city adopted a balanced fiscal 2017 general fund budget, negative variances in certain revenues necessitated a mid-year hiring freeze and other expense reductions in order for the city to remain on a balanced track in the year that ends December 31. The city is currently developing a fiscal 2018 budget with plans to keep operations balanced. Evanston's home rule status provides it broad legal flexibility to raise revenue as it is not subject to property tax levy limits, has no statutory debt ceiling, and has the power to impose a variety of taxes without voter approval. We view this as a key credit strength. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Approximately 40% of the city s operating revenue comes from property taxes. Another 6.3% is from sales taxes and 14.7% is classified as intergovernmental the city s share of various taxes distributed by the State of Illinois (Baa3 negative). LIQUIDITY While general fund cash was narrow at 5.6% of revenues at the close of fiscal 2016, total operating liquidity across major funds was a more satisfactory 17.6 million, or 14.0% of revenues. With the exception of the solid waste fund, the city's major enterprise operations (water, sewer, and parking) all have more than 300 days of cash on hand. The city's solid waste fund carries limited cash and a deficit unrestricted net asset position and requires annual general fund support. However, the annual subsidy is not a significant source of budgetary pressure for the city. Debt and Pensions: High pension and fixed cost burdens At 1.8% of full value and 1.2x operating revenue, Evanston's direct debt burden is above average. These ratios do not include 45.3 million in Illinois Environmental Protection Agency (IEPA) loans and 22.3 million of general obligation debt being repaid by the city's self-supporting water and sewer enterprises. The city plans annual bond sales to finance capital improvements, consistent with plans developed years ago. However, we do not expect material increases in the debt burden because a large portion of future debt will likely be supported by the city's enterprises. The city also plans to issue 12.5 million in coming years to finance a portion of the costs to renovate or replace an ice rink. The three-year average Moody's adjusted net pension liability (ANPL), our measure of a local government's pension burden that uses a market-based interest rate to value accrued liabilities, is a high 4.8% of full value and 3.0x operating revenue. The city's fixed costs, consisting of debt service and retirement plan contributions, were also high at 28.1% of operating revenue in fiscal DEBT STRUCTURE Principal repayment on GO debt is average with 71.0% retired within ten years. All of the city's outstanding debt is fixed rate with the exception of three letters of credit associated with the city's tax increment financing districts. The letters of credit total 7.3 million, of which 5.1 million has been drawn to provide interim financing for capital projects. The Series 2017C bonds will refinance a portion of the letter of credit liabilities into long-term debt. The agreements do not include any acceleration provisions, but the city is subject to a higher interest rate under events of default, including a broadly worded adverse change provision. Under that provision, the lender could consider the city in default if it deemed there had been an adverse change to its financial position. The city's satisfactory financial position and ability to raise revenue mitigate the risks associated with this provision. DEBT-RELATED DERIVATIVES The city is not a party to any derivative agreements. PENSIONS AND OPEB City employees participate in one of two single employer defined benefit pension plans (police and fire) or the Illinois Municipal Retirement Fund (IMRF) a multiple employer agent plan. Factors contributing to recent unfunded liability growth include updated mortality assumptions, weak investment returns relative to assumed rates of return, and city contributions that, while closely conforming with actuarially determined contributions, were not sufficient to fully cover annual interest accruals on accumulated unfunded liabilities. Furthermore, new accounting standards resulted in increased reporting of both assets and liabilities of the city's account with the IMRF. Net of enterprise support, Evanston's fiscal 2016 pension contributions were 20.2 million and a significant 16% of operating revenue. The city's public safety plans are by far the largest of its plans, and Evanston contributed 16.8 million to the public safety plans in fiscal This public safety plan contribution was equal to 100% of the amount needed for both plans to tread water, 1 that is, forestall growth in reported net pension liabilities if other plan assumptions hold. The tread water indicator is based on the pension plans' discount rate, which often matches the assumed rate of return on plan assets. Evanston lowered its plans' assumed rate of return to 6.5% from 6.75% in Even if contributions continue to tread water at the plans' reported discount rates, the city's ANPL may grow, indicating sustained balance sheet challenges. Unfunded OPEB liabilities do not pose a significant credit challenge to the city. The liability reflects the implicit rate subsidy of permitting retirees to remain on the city's health care plan. Evanston's unfunded OPEB liability was 14.5 million as of December 31, 3

4 2016, the most recent actuarial valuation date. The city's fiscal 2016 pay-go contribution of 758,000 was a modest 0.6% of operating revenue. Management and Governance: Home rule authority enhances Institutional Framework Illinois cities have an Institutional Framework score of A, which is moderate compared to the nation. Institutional Framework scores measure a sector's legal ability to increase revenues and decrease expenditures. Revenue-raising ability is moderate overall but varies considerably. Home rule entities, such as Evanston, have substantial revenue-raising authority. Non-home rule entities are subject to tax rate limitations. Total operating tax yield for non-home rule entities subject to the Property Extension Limitation Law (PTELL) is capped to the lesser of 5% or CPI growth, plus new construction. Revenue predictability is moderate, with varying dependence on property, sales, and state-distributed income taxes. Expenditures are moderately predictable but cities have limited ability to reduce them given strong public sector unions and pension benefits that enjoy strong constitutional protections. Legal Security Debt service on Evanston's GO debt is secured by the city's unlimited tax pledge, which benefits from the authority to levy without limitation as to rate or amount. Use of Proceeds The Series 2017A bonds will finance a variety of capital improvement projects. The Series 2017B bonds will refund the city's GO Bonds, Series 2007 bonds for savings. The Series 2017C bonds will finance economic development related projects. Obligor Profile The city is located in Cook County (A2 stable) along Chicago's northern border and 13 miles north of the city's downtown loop. As of the 2016, the city had an estimated population of 75,600. Methodology The principal methodology used in this rating was US Local Government General Obligation Debt published in December Please see the Rating Methodologies page on for a copy of this methodology. 4

5 Ratings Exhibit 2 Evanston (City of) IL Issue General Obligation Refunding Bonds, Series 2017B Rating Type Sale Amount Expected Sale Date Rating Description Taxable General Obligation Corporate Purpose Bonds, Series 2017C Rating Type Sale Amount Expected Sale Date Rating Description General Obligation Corporate Purpose Bonds, Series 2017A Rating Type Sale Amount Expected Sale Date Rating Description Rating Aa2 Underlying LT 9,685,000 09/28/2017 General Obligation Aa2 Underlying LT 5,000,000 09/28/2017 General Obligation Aa2 Underlying LT 14,500,000 09/28/2017 General Obligation Source: Moody's Investors Service Endnotes 1 Our tread water indicator measures the annual government contribution required to prevent reported net pension liabilities from growing, given the entity's actuarial assumptions. An annual government contribution that treads water equals the sum of employer service cost and interest on the reported net pension liability at the start of the fiscal year. A pension plan that receives an employer contribution equal to tread water will end the year with an unchanged net pension liability relative to the beginning of the year if all plan assumptions hold. Net liabilities may decrease or increase in a given year due to factors other than the contribution amount, such as investment performance that exceeds to falls short of a plan's assumed rate of return. Still, higher contributions will always reduce unfunded liabilities faster, or will allow unfunded liabilities to grow more slowly than lower contributions. 5

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7 Analyst Contacts Shannon Bibby Associate Analyst 7 CLIENT SERVICES Matthew Butler VP-Senior Analyst Americas Asia Pacific Japan EMEA