CHICAGO - (Business Wire) Fitch Ratings assigns an initial rating of 'AA-' to the Springfield Metro Sanitary District, Illinois' (the district) $18.8 million general obligation (GO) bonds (alternate revenue source), series 2009A, which are scheduled for a competitive sale on July 8, 2009. In addition, Fitch assigns an implied 'A+' rating to the district's anticipated sale of senior lien sewer revenue bonds, likely to be issued in the fall of 2009. The Rating Outlook is Stable. The GO alternate revenue source bonds are valid and binding obligations and are payable from net revenues of the district after payment of debt service of senior lien sewer revenue bonds and from ad valorem taxes levied against all taxable property within the district without limitation as to rate or amount. Proceeds will refund outstanding series 2007 sewer revenue bonds, fund various improvements, provide for interest payments on the 2009A bonds through April 30, 2010, and pay costs of issuance. While the 2009A bonds are junior to sewer revenue bonds, the higher rating reflects the stronger unlimited property tax pledge for bond repayment.
The 'AA-' rating on the GO bonds reflects the strength of the service territory's tax base and economy, the district's independent ability to set rates, and projected limited, if any, property tax support for the current and future GO bond debt service. The district is about to embark on a major expansion program, and district rates will rise significantly to accommodate future debt and loan issuances. Credit risks include the magnitude of the district's capital plan and some uncertainty with regard to the combined sewer overflow program, historically mixed financial performance, and low pension funding ratio.
The district was organized in 1924 and is located in central Illinois in Sangamon County (the county), serving a population of approximately 147,000. The district is governed by a five-member board appointed by the county board chairman and confirmed by the county board of supervisors. Daily operations are administered by the Director/Engineer. The service area of the district includes nearly 80% of the county's taxable values. About two-thirds of the district is within the city of Springfield (the state capital), and the boundaries also include several nearby villages and unincorporated areas. In addition to sole rate setting ability, credit strength is derived by the irrevocable contract provisions set by the state Sanitary Act, which does not allow participating members to disconnect as long as any revenue or GO bonds are outstanding. In addition, officials report that potential exists for adding customers to the district, through annexations of existing communities as well as planned subdivisions in and around Springfield.
The district's tax base continues to experience growth. Average annual gains in taxable value from 2003-2009 were 4.5%, although a more modest increase was recorded in 2009. In addition to economic expansion, growth in taxable values reflects annexations which have added $11 million since 2003. Permit activity remains steady, with permit values through February 2009 representing 2.6% of taxable values. While not immune to the state and national recession, housing data indicates relatively low delinquency and foreclosure rates for the area. Economic stability is enhanced by the large government, health care, and university presence. Local unemployment rates remain well below state and national averages. Wealth indicators are also below state and national norms.
In June 2005, the district was notified by the Illinois Environmental Protection Agency (IEPA) that its Spring Creek and Sugar Creek treatment plants were operating in excess of rated design capacity. In response, officials acted quickly and were successful in having both plants re-rated by the IEPA on the condition that the district would prepare facility plan studies on the system. Upon completion of those studies, a new plant to replace Spring Creek was approved. Construction for the four-phased project is projected to begin in Sept. 2009, with final completion expected in April 2013. The cost of the new plant is expected to total approximately $130 million, to be funded from a combination of future senior lien sewer revenue bonds, junior lien GO bonds, and subordinate lien IEPA low-interest loans and grants. In addition, expansion of the Sugar Creek plant, estimated to cost $50 million, is anticipated to begin sometime in 2013 or 2014. Once completed, the design capacity for Spring Creek and Sugar Creek plants will increase by 60% and 50%, respectively.
While completing a capital program of this magnitude may pose a challenge, the district has a good history of completing large projects on time and within budget. Further, district management has demonstrated its ability to work closely with the IEPA, several environmental groups, and the community to develop and implement the project. Rates will be raised by 400% over the next seven years, although they are expected to remain affordable and competitive with surrounding utilities. However, some uncertainty remains with the treatment of combined sewer overflow (CSO), a problem the district shares with over 100 utilities in the state. The district has adopted a strategy to address this issue, including funding a $4.7 million CSO study with a portion of the 2009A bonds, and believes that resolution of this issue, while still unclear, is still manageable.
Financial performance, particularly the last three fiscal years, has been mixed, reflecting a reluctance by the prior administration to raise rates, as well as wetter than normal weather (fiscal years 2007 and 2009), and a $1.7 million prepayment expense in fiscal 2008 associated with an early retirement program. However, the fiscal 2009 audit was completed just two months after the close of the fiscal year (ending April 30). Financial results for 2009 showed a 1.1 times (x) all-in debt service coverage and a modest 75 days cash on hand. The unrestricted net asset position was a negative $1.6 million due to the 2008 pension liability prepayment.
Financial projections, based on reasonable assumptions, show a much improved cash position and stronger debt service coverage. In fiscal 2014, days cash (which includes unrestricted and public benefit funds) grows to nearly 150 days while senior and junior debt service coverage is projected to be 1.8x (above the 1.25x rate covenant and additional bonds test for both senior and junior lien bonds) and 1.3x coverage for all-in debt.
The district participates in the state's retirement system for its 43 employees and continues to make its full annually required contribution (ARC). Between 2005 and 2007, just over one-fourth (11) of the district's employees took early retirement, reducing the funded ratio from 84.1% in 2004 to 38.4% in 2007, although the district did realize some cost savings as a result of the program. As of Dec. 31, 2008, the district's funded ratio declined to a very low 11% (or in absolute terms, a more manageable unfunded accrued liability of $4.6 million) reflecting the state retirement system's nearly 25% investment loss as well as the district's small number of employees. While of concern, officials have stated that they will continue to make their full ARC to the plan and have projected increasing ARC payments.
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