June 16, 2012

Elgin tax, fee changes win thumbs-up from bond-rating agencies

Two of the “Big Three” bond-rating agencies have
endorsed Elgin’s 2012 budget and the restructuring
of the city’s revenue streams to make them more
diverse. (Illustration/Ted Schnell • BocaJump)

By Ted Schnell • BocaJump | Saturday, June 16, 2012

A long-anticipated comprehensive evaluation of Elgin’s finances in 2011 refutes criticisms of the city’s handling of its economic crisis heading into 2012, and while skeptics may try to dismiss the report’s assessment, two of the world’s financial powerhouses have not.

Both Standard & Poor’s and Fitch Ratings on June 6 issued their reaffirmation of Elgin’s bond ratings (S&P AA+, Fitch AAA), which essentially maintains the city’s ability to issue general obligation bonds at a low interest rate. Standard & Poor’s and Fitch Ratings are two of the “Big Three” credit-rating agencies that publish financial research and analysis on stocks and bonds, including municipal bonds such as the general obligation bonds the city issues from time to time on public works projects.

The continuation of Elgin’s AA+ and AAA ratings is significant in itself, because it will help keep the city’s borrowing costs down. But, the reasons the two agencies cite for maintaining Elgin’s bond ratings clearly contradict the claims critics have made about the city’s 2011 budget and the steps it took to balance the budget and to diversify revenue streams in 2012.

Those criticisms have focused largely on the city restructuring or diversifying of its revenue streams in a move to reduce its reliance on property and sales tax revenues, which are affected by economic conditions. Shifting instead to a broader array of revenue sources, city officials have said, would reduce the impact of such fluctuations on Elgin’s finances.

The bond ratings agencies agree with that strategy.

“The city prudently implemented several new revenue sources in 2012 to reduce dependence on property taxes and potentially volatile gaming revenues,” Fitch wrote in its assessment of the key rating drivers it considered in its assessment of Elgin. The agency also labeled the city’s fiscal management as strong and its debt burden as modest.

Further, Fitch wrote, “The city has budgeted for substantial further declines in property tax revenues going forward with the tax rate planned to go down over 20 percent by 2014. Beginning in 2012, the city has prudently initiated alternative sources of revenue to offset declines in property tax revenues and diversify its revenue streams.”
Standard & Poor’s likewise commended the city’s “strong financial management under our Financial Management Assessment methodology; and … Moderate overall debt burden.”

“For fiscal 2012, we understand management is on target with its budgeted $7 million general fund surplus (not including the gambling-related funds). The budget includes new revenue sources: a refuse fee as well as natural gas, electricity, and alcoholic beverage taxes,” Standard & Poor’s wrote in its release. “Management reports that it added the revenue sources in response to its five-year financial plan, which necessitated the extra revenue to project at least balanced operations for all five years. We understand the changes also are part of management's plan to reduce its reliance on property taxes, which are partly based on housing values that management believes have been harder to predict during and since the national recession. …

“We consider the city's financial management practices ‘strong’ under our FMA methodology. An FMA of ‘strong’ indicates our view that practices are strong, well-embedded, and likely sustainable.”
City officials have said for years that Elgin must consider shifting, or diversifying its revenue streams, which in the past have relied most heavily upon property taxes, sales taxes, state revenues and revenues associated with the Grand Victoria Casino, which the city long has dedicated largely toward capital construction projects or capital equipment purchases.

Those core revenues began declining with the Great Recession, and the Grand Victoria Casino’s revenues have dipped further with the opening last summer of a new casino in Des Plaines.

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