Fitch Affirms Normal, IL’s IDR and ULTGOs at ‘AAA’; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AAA' rating on the following Normal, Illinois (the town) ratings:

--Issuer Default Rating (IDR);

--approximately $84 million unlimited tax general obligation (ULTGO) bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the town's full faith and credit and unlimited ad valorem taxing authority.

KEY RATING DRIVERS

The 'AAA' rating reflects the town's favorable revenue framework, solid expenditure flexibility and moderate long-term liability profile which support its solid financial position and capacity to maintain financial flexibility throughout downturns.

Economic Resource Base

Normal is located in central Illinois, approximately 130 miles from Chicago. The local economy is anchored by State Farm Insurance, which is headquartered in neighboring Bloomington, and four universities, the largest being Illinois State University (with a student population estimated at 20,788 for fall 2015).

Revenue Framework: 'aaa' factor assessment

Growth prospects for revenue are strong and the town's home rule authority provides broad revenue-raising power.

Expenditure Framework: 'aa' factor assessment

Fitch expects the natural pace of expenditure growth to be in line with that of revenues. Capacity to cut expenditures, if necessary, is solid.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden is moderate relative to the resource base, with adjusted unfunded pensions and overall debt at 12.2% of personal income.

Operating Performance: 'aaa' factor assessment

Ample reserves and superior budgetary flexibility provide exceptionally strong gap-closing capacity relative to expected revenue volatility. Conservative budgeting and policies promote financial flexibility throughout economic cycles.

RATING SENSITIVITIES

Weakened Long-term Liability Profile: An increase in long-term liabilities, including a weakening of pension funding levels or sizable additional debt issuances, could result in downward rating pressure.

CREDIT PROFILE

The town experienced healthy population growth of 15.6% between 2000 and 2010. The town's June 2016 unemployment rate of 5.6% is below the state average (6.0%) but above the national average (5.1%). Wealth levels are below average, likely skewed by the town's large student population.

The town's equalized assessed value (EAV) was growing consistently until it experienced a modest cumulative decline of 1.3% between 2011 and 2013. EAV returned to growth with a 1% increase in 2014 and 2.6% in 2015.

The town takes an active role in economic development and much of the projected growth is located within tax increment districts. The town's development of Uptown Station, highlighted by a new multi-modal transportation center, has spurred business growth as well. State Farm's full-time work force has remained relatively steady, with no future changes expected. Mitsubishi closed its Normal plant in May, which may have a marginal effect on unemployment. Direct revenue impact on the town will be minimal as the plant generates approximately $100,000 in utility taxes and $50,000 in property taxes annually.

Revenue Framework

General fund revenues are mainly comprised of property, sales, and other taxes. In fiscal 2015, property taxes represented 13%, and sales, income and other taxes accounted for 63% of general fund revenues. The town's reliance on sales and income taxes makes the revenue stream somewhat vulnerable to economic variability; however, historical volatility has been minimal.

The town's diverse revenue stream is well-positioned to benefit from economic growth. Fitch expects the natural pace of revenue growth will be in line with or exceed national GDP, given economic trends. Recent modest growth in EAV should continue given extensive economic development efforts. Growth in the sales tax has been more modest than originally budgeted for, primarily due to lower gasoline prices, but this has been offset by larger than expected gains in income and food and beverage taxes.

The town has ample independent legal ability to raise revenues. As a home rule entity under Illinois law, it has access to a broad array of taxes and fees, many of which do not have a legal limit.

Expenditure Framework

Public safety comprises 41% of general fund spending, followed by general government at 18%, culture and recreation at 17% and community development at 7%.

The natural pace of spending growth should remain comfortably in line with that of revenues, given underlying economic trends.

The town maintains solid expenditure-cutting flexibility, supported by the inclusion of discretionary items in the operating budget (vehicles, maintenance and pay-go capital equivalent to 19% of general fund spending) and moderate carrying costs for debt service, pension and other post-employment benefits (OPEB) at 15.6% of governmental spending. The town's labor relations are satisfactory. Only public safety employees are represented by unions, with contractual agreements typically reached by negotiation, without resorting to arbitration.

Long-Term Liability Burden

The town's long-term liability burden is moderate with Fitch-adjusted unfunded pensions plus overall debt at 12.2% of personal income. Direct debt accounts for a little more than a third of the liability. Additional borrowing plans are moderate and amortization is slow at 35.5% in 10 years. Approximately a third of the liability relates to overlapping debt.

A little less than a third of the liability relates to the unfunded pension liability. The town offers three pension plans to employees. The town's regular (non-public safety) employees are covered by a defined benefit agent multi-employer plan offered through the Illinois Municipal Retirement Fund (IMRF). The IMRF plan is 82% funded, or an estimated 78% funded when adjusted by Fitch to reflect a 7% investment rate of return. The town also has single-employer police and fire pensions, both of which are less well funded. The police plan reports a 55% ratio of plan assets to liabilities, using a 6.75% return assumption. The firefighter's plan reports a 57% ratio of plan assets to liabilities, also using a 6.75% return assumption. Those two plans combined have a net pension liability of $46.9 million, which, when combined with the $14.4 million unfunded accrued actuarial liability for the IMRF plan, represents 3.3% of personal income.

The town has taken steps to improve funding for the police and fire plans, lowering the return assumption and setting a goal of a 100% funding level by 2040, which is more conservative than the state minimum 90% by 2040. The town consistently makes its actuarially-based annual required contribution for all plans.

The town funds other post-employment benefits (OPEB) on a pay-go basis. The plan's unfunded actuarially accrued liability represented an additional 1.9% of personal income in 2015.

Operating Performance

The town's home rule ability to raise revenues and solid expenditure flexibility combine with its solid reserve levels to provide exceptional capacity to close recessionary revenue gaps. Fitch expects that the town would be somewhat more vulnerable to revenue declines in a downturn than the minimal volatility suggested by Fitch's FAST model, which does not correct for the offsetting policy actions the town has taken during prior recessions, but that such declines would be still be modest. Fitch expects that in a downturn scenario, some use of reserves might be necessary in the short term, but that the town would employ its revenue and/or expenditure-cutting flexibility to maintain sufficient financial flexibility throughout the economic cycle.

The town budgets conservatively and has maintained strong reserves as protection against future cyclical revenue declines. The commitment to fund its public safety pensions on an accelerated schedule also promotes financial flexibility.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011077

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011077

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160831006542/en/

Fitch Ratings

Primary Analyst

Arlene Bohner
Senior Director

+1-212-908-0554

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Matthew Wong
Director

+1-212-908-0500

or

Committee Chairperson

Ronald McGovern
Senior Director

+1-212-908-0513

or

Media Relations

Elizabeth Fogerty
+1-212-908-0526

New York

[email protected]

Source: Fitch Ratings