Evanston (City of), IL

CREDIT OPINION Evanston (City of), IL Moody's Downgrades Evanston's GO to Aa2; Assigns to 2016 Bonds New Issue Summary Rating Rationale Moody's Investors Service has downgraded the City of Evanston's (IL) General Obligation rating (GO) to Aa2 from Aa1. Concurrently, Moody's has assigned the Aa2 to the city's $14 million GO Corporate Purpose Bonds, Series 2016A and $8.0 million GO Refunding Bonds, Series 2016B. Following the sale, the city will have $159 million of GO debt outstanding. Contacts David Levett Analyst david.levett@moodys.com 312-706-9990 Thomas Aaron 312-706-9967 VP-Senior Analyst thomas.aaron@moodys.com The downgrade to Aa2 reflects a multi-year erosion in city reserves and growing unfunded pension liabilities. The presence of these ongoing pressures combine with the city's sizable tax base, revenue raising flexibility, still sound reserve levels, and strong economic profile anchored by Northwestern University (Aaa stable) to support the Aa2 rating. 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 Track record of making expenditure reductions and adjustments to address pension liabilities Credit Challenges Multi-year trend of erosion in reserves Elevated unfunded pension liabilities and above average debt burden Rating Outlook Outlooks are usually not assigned to local government credits with this amount of debt. Factors that Could Lead to an Upgrade Reduction in the city's debt and pension burden Sustained strengthening in financial operations leading to significant growth in reserves and liquidity Factors that Could Lead to a Downgrade Declines in operating reserves

Increases in debt levels or pension liabilities Key Indicators Exhibit 1 Source: audited financial statements, Moody's Investors Service and US Census Bureau Detailed Rating Considerations Economy and Tax Base: Affluent Suburb Adjacent to Chicago With Sizable Tax Base Benefits From Institutional Presence Evanston is a key economic hub within the Chicago regional economy supported by significant institutional presence. Evanston is home to Northwestern University, the city's top employer with more than 10,000 employees. In addition to higher education, healthcare is an anchor of the city's economy. North Shore University Health System and St. Francis Hospital employ over 4,000 and 1,000, respectively. Interstate 94, rapid transit, and commuter rail stations provide residents with easy access to additional employment centers in Chicago and throughout the region. The city's tax base is sizable at $6.7 billion tax base is, but remains 33% below it prerecession peak. Despite university students accounting for more than 10% of the city's population, the per capita income, median family income, and median home value of Evanston residents have consistently exceeded state and national norms for at least the past four decades. 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 given the university and hospital presence. Financial Operations and Reserves: Adequate Reserves Despite Multi-Year Trend of Operating Deficits We expect the city's multi-year trend of declining reserves to come to an end in fiscal 2016, based on year-to-date financials that indicate an influx in permit revenue and positive trends in other key revenue sources. Management has expressed a commitment to halt the decline in reserves because the city's General Fund balance now falls short of its policy to maintain an unassigned balance equal to two months expenditures. The city closed fiscal 2015 with an available Operating Fund balance of $25.8 million, or a sound 21.1% of revenues. We consider the General, Debt, Emergency Telephone System, Economic Development, and General Assistance funds as operating funds. Reserves have eroded in recent years with the Operating Fund balance declining by $16.3 million since fiscal 2011, inclusive of a $7.8 million decline in the General Fund that brought the General Fund balance in fiscal 2015 to $10.6 million or 10.0% of revenues. Officials attribute the most recent $2.5 million operating shortfall in the General Fund to delays in receiving $3 million in permit revenues. A variety of other factors have also contributed to the longer-term trend of eroding reserves, including one-time capital project expenses and changes in accounting that have impacted the recording of receivable revenues. Officials are 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 www.moodys.com for the most updated credit rating action information and rating history. 2

projecting an $800,000 General Fund operating surplus for fiscal 2016. The fiscal 2017 budget has not yet been adopted, but officials are planning for balanced operations. Looking ahead, the city may draw down the assigned portion of the General Fund balance ($5.6 million) at a rate of $500,000 per year, but plans to maintain or grow the unassigned fund balance ($4.9 million). LIQUIDITY While General Fund cash was narrow at 2.1% of revenues at the close of fiscal 2015, total Operating Fund liquidity was adequate at $17.4 million, or 14% of revenues. Officials expect the city's cash balances to improve in line with fund balance in fiscal 2016. 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 though officials expect its financial position to continue to strengthen in coming years. Debt and Pensions: Above Average Debt Burden; Heightened Contributions to Address Pension Challenges, but Unfunded Liabilities Continue to Grow The city's debt burden is expected to remain above average though manageable. At 2.5% and 5.6% of estimated full value, respectively, the city's direct and overall debt burdens exceed state and national medians. The city's debt burden is more moderate compared with operations at 1.3 times revenues. These ratios do not include Illinois Environmental Protection Agency (IEPA) $51 million loans that are self-supporting from the Sewer Fund. The city's fixed costs inclusive of debt service, pension contributions, and other post-employment benefits (OPEB) were a significant 28% of operating revenues. The city plans to continue to issue GO bonds for capital improvement projects yearly, with a goal to retire more levy supported debt than is being issued. 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. DEBT STRUCTURE 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 $7.2 million, of which less than one half has been drawn to provide interim financing for capital projects that will later be fixed 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. Risk associated with that broadly worded provision is somewhat mitigated by the city's very high Aa2 rating and sound liquidity. Principal repayment on GO debt is average with 74% retired within ten years. DEBT-RELATED DERIVATIVES The city is not a party to any derivative agreements PENSIONS AND OPEB Evanston's unfunded pension burden remains large despite annual contributions from the city that exceed both actuarial requirements and Moody's tread water indicator. Management has adopted more conservative actuarial assumptions in the city's single employer police and fire pension funds, including an investment return assumption of 6.5% compared to 7% a few years ago. Management is currently considering further lowering of the rate. Although the city's police and fire pension plans are single employer plans, benefits and employee contribution levels are established by Illinois statute. State statute also outlines minimum employer contributions, which the city has consistently exceeded. Non-public safety employees of the City of Evanston participate in the Illinois Municipal Retirement Fund (IMRF). The three year average adjusted net pension liability (ANPL) for the city, is elevated at $342 million equivalent to 2.8 times operating revenues, or 5.2% of full value. Liabilities grew in both on a reported and adjusted basis in 2015, due in part to the adoption of new mortality tables and investment performance. Favorably, the city's fiscal 2015 contributions plans exceeded our tread water indicator, with the city contributing 110% of this benchmark. The tread water indicator measures the annual employer contribution required to prevent the reported net pension liability from growing, under plan assumptions. After accounting for employee contributions, annual 3

government contributions that tread water equal the sum of employer service cost and interest on the reported Net Pension Liability at the start of the fiscal year. The city has an Other Post Employment Benefit (OPEB) unfunded liability of $15.8 million, which represents the implicit rate subsidy of the state mandate to allow retirees to stay on the city's health care plans and cost of health care for public safety personnel disabled in the line of duty. The city does not prefund the liability. Management and Governance: Home Rule Status Provides Broad Revenue Raising Authority Illinois cities have an institutional framework score of A, or moderate. Revenue predictability is moderate, with varying dependence on property, sales, and state-distributed income taxes. Revenue-raising ability is also moderate but varies. Home rule entities, such as Evanston, have substantial revenue-raising authority with the power to impose variety of taxes without voter approval. Expenditures are moderately predictable for Illinois cities, but they have limited ability to reduce pensions expenses given pension benefits enjoy strong constitutional protections. State shared income tax receipts have previously been proposed for cuts. Evanston received $8.3 million in income tax receipts in fiscal 2015, equivalent to 7% of revenues. The city is in the process of expanding its contingency plans for expenditure cuts should there be an impact from the state's financial challenges. While its efforts have not prevented unfunded liabilities from growing in recent years, the city's management has demonstrated a proactive approach toward addressing its pension challenge. Evanston cannot make benefit adjustments for new employees because they are outlined in state statute, and the state's constitution provide stringent legal protections for pension benefits of current and retired employees. However, the city has consistently contributed above actuarial requirements and adopted more conservative actuarial assumptions than in past years. Legal Security Debt service on Evanston's GO debt is secured by the city's GO unlimited tax pledge, which benefits from the authority to levy without limitation as to rate or amount. Use of Proceeds The Series A bonds will finance a variety of capital improvement projects. The Series B bonds will refund the city's GO Bonds, Series 2006 bonds for savings. Obligor Profile The city is located in Cook County (A2 stable) adjacent to Chicago's northern border and 13 miles north of city's downtown loop. As of the 2015, the city had an estimated population of 75,570. Methodology The principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology. Ratings Exhibit 2 Evanston (City of) IL Issue General Obligation Corporate Purpose Bonds, Series 2016A Rating Type Sale Amount Expected Sale Date Rating Description General Obligation Refunding Bonds, Series 2016B Rating Type Sale Amount Expected Sale Date 4 Rating Aa2 Underlying LT $14,000,000 09/07/2016 General Obligation Aa2 Underlying LT $8,155,000 09/07/2016

Rating Description General Obligation Source: Moody's Investors Service 5

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Contacts David Levett Analyst david.levett@moodys.com 7 CLIENT SERVICES 312-706-9990 Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454