OREANDA-NEWS. April 29, 2016. Fitch Ratings has downgraded the Issuer default Rating on the Village of Skokie (IL) to 'AA+' from 'AAA'.

In addition, Fitch assigns an 'AA+' rating to the following:
--\\$9.2 million taxable general obligation (GO) refunding bonds, series 2016A bonds.

Fitch downgrades the rating on the following:
--\\$59 million general obligation bonds to 'AA+' from 'AAA'.

The Rating Outlook is revised to Stable from Negative.

SECURITY
General Obligation

KEY RATING DRIVERS

The downgrade is based on the village's solid revenue framework given its moderate revenue growth prospects in the absence of revenue-raising measures and its home rule status giving the village significant legal ability to increase tax rates. The village has maintained expenditure growth in line with recurring revenue, which has resulted in a strong operating performance and healthy general fund reserves. The long-term liability burden and carrying costs are moderate; however, pension costs are expected to increase given the plan's poor asset-to-liability funding ratio.

Economic Resource Base:
The village is an affluent residential community in close proximity to Chicago with a strong commercial and industrial presence. Additionally, the local economy has a large retail presence with three large shopping centers and four major hotels and significant ongoing development of new stores and restaurants.

Revenue Framework: 'aa' factor assessment
The village has benefited from strong revenue-raising flexibility given its home rule status, and history of implementing new revenues to maintain stable financial operations. Equalized assessed property valuations declined significantly throughout the recent economic downturn and have increased slightly in 2015.

Expenditure Framework: 'aa' factor assessment
The natural trend of expenditure growth is moderate given manageable carrying costs and expected increasing pension funding costs. Fitch expects that expenditures will remain manageable based on the village's ability to make necessary spending reductions.

Long-Term Liability Burden: 'aa' factor assessment
Debt and pension are moderate, accounting for 11.6% of person income.

Operating Performance: 'aaa' factor assessment
The village has demonstrated significant financial resiliency and has maintained strong financial flexibility including healthy general fund reserves by implementing new recurring revenue sources to maintain strong financial results.

RATING SENSITIVITIES
The village's credit rating is sensitive to maintaining balanced financial operations and healthy general fund balances while fully funding the annual required contributions of long-term employee benefits which are expected to increase.

CREDIT PROFILE
The village is an affluent residential community in close proximity to Chicago with a strong commercial and industrial presence. The village has a major retail and commercial center including several large industrial areas encompassing approximately 250 businesses. The village has above-average wealth levels with median income approximately 140% of the state and U.S. The village's February 2016 unemployment rate of 5.6% is lower than the state's 6.8% rate but higher than the nation's 5.1% rate.

Revenue Framework
The village is a home rule municipality and is not subject to the state's Limitation Law and can implement local-option revenue sources.

Revenue growth is expected to continue to exceed the level of inflation but remain below U.S. economic growth based on the trend of modest growth over the past 10 years. After a large 39% decline in equalized assessed valuations (AV) from 2010 through 2014, the village had a modest 2.57% increase in AV in 2015. Sales tax collections increased by 11.6% from the prior year due to an increase in the home rule sales tax rate to 1.25% from 1% and new economic activity including the opening of a new Wal-Mart and other retail businesses.

The village is a home rule municipality and is not subject to the state's Limitation Law and can implement local-option revenue sources including the Home Rule sales tax which was implemented in 1991 at a rate of 0.75%. Additionally, the village implemented the Municipal Utility Tax in 2010 to address the rising cost of pensions and has been entirely dedicated to funding the village's pension plans. Revenues are expected to increase by \\$3 million in fiscal 2016 due to other policy actions including a one-cent natural gas tax increase per therm and a new 2% food and beverage tax on gross receipts from prepared foods.

Expenditure Framework

The village has demonstrated solid ability to maintain modest expenditure growth compared to revenue growth. Carrying costs are manageable at 20.4% of governmental spending in fiscal 2015. The village had a prior history of underfunding its total annual actuarially required pension contributions, but recently increased funding levels to pension funds. Management plans to continue increasing funding levels to the two funds in fiscal 2016 and 2017. The village funds its other post-employment benefits (OPEB) on a pay- as-you-go basis, and the implicit subsidy for benefits results in a low unfunded actuarial liability of \\$10.5 million as of April 30, 2015.

Labor relations are governed by collective bargaining agreements which provide management moderate control over labor costs. Management has the ability to control headcount to manage employee salary and benefit cost and utilized hiring freezes to reduce expenditures rather than laying off employees.

Long-Term Liability Burden
The village's long-term liability burden is moderate, with debt and pension liabilities equivalent to 11.6% of personal income. Overall debt is 4.8% of full value and the net pension as a percentage of market value is 2.1%. Direct debt amortizes rapidly with 81% of principal maturing in 10 years.

The village manages two pension plans for police and fire and participates in the state's municipal retirement plan. The police and fire pensions are poorly funded with actuarial accrued assets as a percentage of the total liability of 69% and 57%, respectively. The Illinois Municipal Retirement pension asset-to-liability ratio is 84%.

The village's implicit rate subsidy for OPEB results in a low unfunded actuarial liability of \\$10 million, or 0.20% of market value as of April 30, 2015.

Operating Performance
The Inherent budget flexibility is high given the village's status as a home rule municipality and ability to manage main line expenditures including fund long-term pension obligation. General fund reserves are well above Fitch's minimum reserve safety margin with a fiscal 2015 ending fund balance equivalent to over 25% of general fund expenditures. Given the ample reserves, strong financial policies and significant legal revenue-raising ability, Fitch expects the village to maintain strong financial operations.

The village has maintained healthy financial operations and general fund reserves since 2012 after drawing down general fund balances from 2007 through 2011 and by funding pension obligations at less than the actuarially-required rate. Management has been proactive in implementing new recurring revenues to maintain stable operations and fund long-term liabilities. In 2010, the village implemented a municipal utility tax which has been dedicated to funding the three pension systems. Throughout the most recent economic downturn, expenditure growth was managed through a hiring freeze and only limited reductions in services to residents. The village is expected to maintain stable operations based on its history of increasing sales and other local tax rates as needed.