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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has downgraded the following rating on Waukegan Board of Library Trustees, Illinois (the library) debt:

--$3,690,000 million limited tax general obligation debt certificates, series 2010, to 'A-' from 'AA-'.

The Rating Outlook is Stable.

SECURITY

The certificates are valid and legally binding direct obligations of the library payable from any funds of the library legally available for such purpose. The library agrees to appropriate funds annually and in a timely manner as to provide for the making of all payments due under the terms of the certificates. The library does not have taxing power.

KEY RATING DRIVERS

DOWNGRADE REFLECTS LIBRARY EXPOSURE TO CITY: The 'A-' rating reflects the library's exposure to the below-average credit fundamentals of the city of Waukegan.

STRONG RESERVES INSULATE LIBRARY AGAINST CITY FINANCES: The library has a history of strong and increasing fund balances which help to insulate against the city's weak financial position and challenged operations.

CITY LIQUIDITY REMAINS CONSTRAINED: The city's liquidity has historically been constrained as marked by the need for both internal and external borrowing to maintain cash levels.

PROVEN, STRONG CITY SUPPORT: The library lacks taxing authority but maintains a strong commitment from the city to support the library's revenue base. The city continues to increase its property tax levy dedicated to library operations.

WEAK SOCIOECONOMIC INDICATORS: The local economy is challenged with above-average unemployment rates, below-average wealth levels, and recent tax-base contraction.

MODERATE DEBT: The city's and the library's aggregate debt burden is moderate and future capital needs are manageable. However, the city's debt service is a high 12.6% of spending, reflecting rapid debt amortization.

POOR PENSION FUNDING: The city and library's pensions are underfunded, which will pressure future budgets.

CREDIT SUMMARY

The library, coterminous with and a component unit of the city of Waukegan, is located in Lake County approximately 40 miles north of Chicago. The library's nine-member board is selected by the city's mayor and approved by the city council.

LIBRARY IS FINANCIALLY DEPENDENT ON CITY

The library is exposed to the city's poor financial position and dependent on the city for levying its property taxes. The city has a history of negative financial margins leading to an unreserved general fund deficit in fiscal 2010, operating subsidies from its water and sewer fund, and notably poor budgeting and financial reporting. While the health of the city's general fund has improved since 2010, Fitch remains concerned that fund balance levels are insufficient at the present level to mitigate the city's reliance on economically sensitive revenue sources.

The city's general fund liquidity remains somewhat tight at year-end 2011. The city has a history of interfund and external borrowing for general fund liquidity. A transfer of $7 million from the working cash fund (debt-funded) propped up the general fund's liquidity in 2010. Payments from the state of Illinois, delayed in 2009 and 2010, are being remitted in a timely manner, easing liquidity concerns somewhat.

While the city has home rule status and therefore considerable legal flexibility in regard to its property tax levy, its weak per capita property values and overall economy combined with the fact that it held flat its overall tax levy (corporate, debt, pensions, library) from the prior to current fiscal year suggests that management may limit the prospects for near-term property tax increases. However, the city was able to implement a new food and beverage tax in 2011, providing almost $1 million in annual revenue.

Fitch considers as a credit positive the library's strong working relationship with the city, which consistently levies a substantially higher dedicated millage (2.54 mills in 2011) than required by state statute. The library is highly dependent on property taxes; this source represented 89% of general fund revenues in fiscal 2012.

STRONG RESERVES PARTIALLY INSULATE LIBRARY

As a result of the city and library's strong relationship and the library's prudent fiscal policies, the library's unreserved fund balance was strong at 45% of spending at year-end 2011, helping to insulate the library from exposure to the city. Positive operations were achieved mainly through a 27% cut in operating hours. Management projects that 2012 operations will result in a small surplus by continuing prior-year cuts and headcount reductions. The library's 2013 budget continues the trend of strong city support with 5% growth in the city's library levy and incorporates a small operating surplus. Continued expenditure monitoring will remain key to the library's financial flexibility given its revenue-raising constraints.

WEAK ECONOMIC INDICATORS

Reflective of continued challenges in the local economy, the city's unemployment rate was notably elevated at 10.9% in June 2012, well above state (9.3%) and national (8.4%) averages. The city experienced tax base decline of 11.3% since peak (2009); however, the city benefits from revenue raising flexibility to offset contractions due to its home-rule powers. Wealth indicators are below both state and national averages. The city's top employers represent health and higher education and manufacturing sectors.

MODERATE DEBT; POOR PENSION FUNDING

Fitch does not expect that debt payments will represent near- or middle-term financial pressure for the library, as debt is moderate ($2,661 per capita; 4.8% of market value) and future capital needs are modest and expected to be financed through private donations. The city's 2011 debt service payment was 12.6% of general fund but this elevated level reflects very rapid principal amortization, at 92% in 10 years.

Fitch expects that the city's and library's annual pension payments will likely increase given that the state plan to which they contribute is underfunded (59% in 2011 based on Fitch's 7% rate-of-return assumption) and statutory contribution rates, which the library and city pay in full, are less than the actuarially determined rates.

Post-employment benefits are limited to an implicit rate subsidy, which is not presented separately for the library from the city's financial reporting. The city's unfunded actuarially accrued liability is $43.2 million, representing a scant 0.1% of market value.

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, and IHS Global Insight.

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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