Fitch Affirms Metro Water Reclamation District of Greater Chicago, IL GOs at 'AAA'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the following Metropolitan Water Reclamation District of Greater Chicago, Illinois (the district) ratings at 'AAA':

--$1.128 billion outstanding unlimited tax general obligation (ULTGO) bonds;

--$973.9 million outstanding limited tax general obligation (LTGO) bonds.

The Rating Outlook is Stable.

SECURITY

The ULTGO bonds are secured by the district's full faith and credit and its ad valorem tax, without limitation as to rate or amount.

The LTGO bonds are secured by the district's full faith and credit and its ad valorem tax, without limitation as to rate but limited as to amount pursuant to the property tax extension limitation law.

KEY RATING DRIVERS

LARGE, DIVERSE ECONOMIC BASE: The district serves the deep and diverse Chicago metropolitan area, which acts as the economic engine for the Midwest region. The area features abundant employment opportunities in a wide variety of sectors, and continued economic growth is supported by the region's vast infrastructure network.

SOUND FINANCIAL OPERATIONS: Substantial net operating surpluses in fiscals 2011 (audited) and 2012 (unaudited) augmented the district's already sound reserves.

MANAGEABLE DEBT LOAD: Aggregate debt levels are currently easily managed although principal amortization is slow, and future capital needs are substantial.

PENSION FUNDING EXPECTED TO IMPROVE: The district's pension system is weakly funded, due to a statutory framework which results in annual underfunding of the annual pension contribution (APC). Recently passed legislation affecting the retirement fund levy will allow for greater annual contributions beginning in 2014 and should over the long term result in improving funded ratios.

STRONG MANAGEMENT: The district benefits from seasoned management with a history of prudent financial stewardship.

ULTGO AND LTGO RATINGS ON PAR: The limited and unlimited tax bonds are rated on parity as currently there are no practical differences in the district's legal ability to collect sufficient taxes to pay debt service.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices and plans to improve pension funding. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The district encompasses 91% of the land area and 98% of the assessed valuation (AV) of Cook County (rated 'AA-' with a Negative Outlook by Fitch) and provides wastewater treatment services to roughly 5.3 million people located in the city of Chicago and 125 suburban municipalities. Although the district has no direct control over wastewater collection and transmission systems maintained by local governments within the county, the district does control sewer construction and expansion through the permitting process.

Wastewater is transported to the district's seven treatment plants through a network of interceptor sewers and force mains that connect to local municipal sewer systems. The district's remaining treatment capacity is adequate at 30% with average daily treatment at 1.4 billion gallons per day (BGD) compared to 2.0 BGD treatment capacity. In addition, the district operates a system of underground tunnels designed to store combined sanitary overflows during wet weather periods to prevent untreated discharge.

LARGE, DIVERSE ECONOMIC BASE

The local economy is anchored by the economic and cultural hub of Chicago and its surrounding bedroom communities. The district's full market value declined during the recent economic downturn, but remains strong at $550.1 billion or $105,000 per capita. While moderate future declines are anticipated due to assessment lag, Fitch expects the tax base to remain robust overall.

County wealth indicators are generally on par with the statewide averages, as the affluent suburban population offsets the urban core. The county, which represents about 40% of the statewide economy, is showing signs of recovery from the recent recession. The December 2012 unemployment rate of 8.9% is markedly lower than the 9.7% recorded a year prior, and is now only modestly higher than the state rate of 8.6%. Favorably, the drop in the county's unemployment rate is a result of employment growth strongly outpacing growth in the labor force.

SOUND FINANCIAL OPERATIONS

The district's positive financial profile is underscored by the stability of its property-tax-dependent revenue stream as well as its limited operational responsibilities and demonstrated expenditure flexibility. The district recorded a substantial net operating surplus, equivalent to 23% of spending in fiscal 2011, leaving the overall general fund balance at 92% of spending.

Unaudited results indicate another significant net operating surplus in the range of 15% of spending for fiscal 2012. The negative unrestricted general fund balance results from the district's policy of reserving the entire amount of its levy plus any available surplus for 'working cash.' This working cash balance is available for general operations in the subsequent year and is not suggestive of an accumulated deficit.

The district's revenue stream is highly dependent upon property taxes, which provide a stable 68% of general fund revenues. Charges for services account for another 19% of the revenue stream. The district's 2013 budget includes an increase in the property tax levy that is less than the full amount allowed under the Property Tax Extension Limitation Law. The budget also earmarks $30 million of interest earnings for additional pension funding as a bridge to the greater funding levels triggered by the increase in the retirement fund levy (levied in 2013 for collection in 2014) allowed by the new legislation.

MANAGEABLE DEBT LOAD

Direct debt levels are modest at $490 per capita and 0.5% of market value. Substantial overlapping borrowing results in a more moderate overall debt burden of $3,960 per capita or 3.8% of market value. Principal amortization is slow with 34% repaid within 10 years. The district currently has no exposure to variable obligations or derivatives agreements.

Future capital needs are significant. The district is in the process of reprioritizing its five-year capital improvement plan, applying different technologies to moderate costs. Annual spending for the plan averages $200 million per year, to be funded with a mixture of bonded debt and state revolving fund (SRF) borrowing. The district recently received a $250 million SRF allocation to fund rehabilitation, flood and pollution prevention projects. Prospectively, the implementation of the capital plan and actual scale of the overall debt burden could be more of a credit factor, although Fitch expects the district will continue to manage its capital plan in a prudent manner.

WEAK PENSION FUNDING EXPECTED TO IMPROVE

The district's single-employer pension plan is weakly funded at 52%, or an even weaker 48% when adjusted by Fitch to reflect a 7% discount rate. The below-average funded ratio has historically been driven by the prior statutory pension funding framework, which restricts employee contributions to 9% and employee contributions to an amount equal to the total employee contributions two years prior, multiplied by a factor of 2.19.

These restrictions have resulted in the district underfunding its annual pension contribution (APC) by half. Newly passed legislation should ameliorate the situation, however, as employee contributions will be increased by 1% per year for three years, and the employer portion multiplier is changed to a maximum of 4.19. These changes should allow the district to achieve full funding of the APC beginning in fiscal 2014 and should result in improved funding ratios going forward.

Other post-employment benefits (OPEB) are also provided to retirees. The district modified the benefit in 2011 such that the district pays a declining proportion of retiree health care plan costs, offset by a 2.5% per year retiree contribution increase through 2021. The district has established and is contributing to an OPEB trust which was 14% funded at the end of 2011, with the aim of 50% funding by 2030. Overall carrying costs for debt service, pension and OPEB are elevated at 42% (or 49% if the full APC were funded), but this is reflective of the limited scope of the district's operations.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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