Moody's Investors Service has downgraded the Village of Matteson's (IL) outstanding rated general obligation debt to Baa2 from A1, affecting $23.2 million. The outlook has been revised to negative. Concurrently, Moody's has assigned a Baa3 rating with negative outlook to the village's $28 million General Obligation Capital Appreciation Debt Certificates (Limited Tax), Series 2010. The rating distinction between the village's general obligation unlimited tax bonds and general obligation debt certificates reflects the weaker security of the certificates, which do not benefit from a dedicated property tax levy. Proceeds from the Series 2010 debt certificates, which are ultimately secured by monies in all legally available operating funds, will finance the acquisition, construction, and the equipping of a new community recreation center. Additionally, the certificates will fund additional capital infrastructure and equipment improvements over the next three fiscal years.
The downgrade to the Baa2 rating and assignment of the Baa3 rating incorporates the village's significantly pressured financial position with negative (GAAP basis) reserve levels expected to be reflected in the forthcoming audits, moderately-sized tax base experiencing steady growth primarily due to commercial and retail development, and an elevated debt burden with below average principal amortization and no immediate borrowing plans. Assignment of the negative outlook reflects the village's precarious financial position and Moody's expectation that the village will be challenged to implement strategies to improve reserve levels in an environment of expenditure pressure and weakened revenue streams. Further, the negative outlook reflects the lack of a definitive and timely recovery strategy to restore the village's financial position.
CONSECUTIVE YEARS OF STRUCTURAL IMBALANCE LEADS TO SUBSTANTIAL DEFICIT GENERAL FUND RESERVES; FURTHER NARROWING EXPECTED; NEW MANAGEMENT TEAM
Moody's believes the village's financial position will remain pressured, despite the recent implementation of revenue and expenditure adjustments that are expected to restore structural balance in fiscal 2011. The weakening of economically sensitive revenue streams continues to negatively impact the village's fiscal operations. The General Fund held $5.6m in reserves (31.5% of revenues) in fiscal 2006, a historical high for the village. Sales tax receipts are the village's largest revenue stream, contributing 31% of the village's operating revenue in fiscal 2008. Despite budgeting for a $22,000 surplus, the village ended fiscal 2008 with a sizable General Fund operating deficit of $2.6 million, decreasing its General Fund balance to $2.9 million, or 15% of General Fund revenues (13.7% undesignated). According to management, the operating deficit was primarily driven by negative expenditure variances in the areas of public safety and general operations as well as sales tax collections that were $1.4 million below budgeted figures.
Fiscal 2009 saw further narrowing in the village's finances. While former management budgeted for a $400,000 general fund surplus in fiscal 2009, un-audited cash figures depict a sizable operating deficit of $4 million. Similar to fiscal 2008, sales tax revenues posted a negative budget-to-actual variance of approximately $1.5 million. In conjunction negative revenue variances, public safety expenditures were significantly higher than expected, primarily due to over-time costs as a result of vacant positions that were unfilled and higher than anticipated workers compensation claims. Management also notes that operating expenses relating to village growth and dated infrastructure contributed to the deficit figure. Un-audited figures indicate the operating deficit brought the village's General Fund balance down to negative $1.1 million (or a pressured -7.6% of 2009 estimated revenues). Moody's notes that despite several years of weak budget to actual performance, no revenue or expenditure adjustments were made in fiscal 2009.
The village budgeted for an operating deficit of $2.3 million in fiscal 2010, though management expects a deficit closer to $2 million, increasing the General Fund deficit to an estimated negative $3.1 million (or an exceedingly weak -22% of 2009 budgeted revenues). This shortfall is primarily driven by larger-than-budgeted expenditures. More recently, new management has taken active measures to alleviate fiscal pressure, including the elimination of 22 non-public safety employees, which is expected to save $900,000 annually. Moody's notes, this savings will not be fully realized until fiscal 2011. Additionally, management has announced spending freezes, cancellation of village-sponsored events, closer review of contracts and services, and the possibility of an additional $1 million in cuts prior to the end of the current fiscal year. On the revenue side, management has increased building, traffic compliance ticket, business license, and park and recreation service fees. Additionally, officials intend to take a 50% E911 surcharge increase to referendum in February 2010. Management expects the cumulative impact of these revenue adjustments to be between $700,000 and $1 million annually, although the overall impact of these budgetary adjustments will be more limited in the current fiscal year, which ends April 30.
Officials estimate these measures will yield balanced budget operations in fiscal 2011. Though Moody's acknowledges recent measures taken by management to curtail expenditures and bolster operating revenues could improve the village's fiscal position, the impact of these actions will likely be insufficient to substantially reduce the accumulated General Fund deficit balance. The inability to continue identifying and implementing a strategy to restore and maintain structural balance while rebuilding operating reserves would result in additional downward pressure on the village's overall credit profile.
DIVERSIFYING TAX BASE EXPERIENCING MODEST GROWTH
Moody's believes the village will continue to experience moderate growth in taxable valuation over the medium term due to its proximity to the city of Chicago (rated Aa3/stable outlook), and continuing commercial and retail development. Located approximately 30 miles southwest of Chicago, the village serves as an industrial and retail center for the southern portion of Cook County (rated Aa3/stable outlook) and neighboring communities. The village's full valuation, a moderate $1.8 billion in 2008, has increased at an annual average rate of 11% over the last five years. Recent projects within the village include the continued development of property surrounding the Lincoln Shopping mall and the creation of two business districts. While the mall's occupancy is stable, the recent economic downturn has placed redevelopment efforts on hold. Favorably, property in the surrounding vicinity has seen strong commercial and retail growth. Retail establishments such as JC Penney and Target, which previously occupied space in Lincoln Mall, have constructed stand-alone facilities amongst smaller retail facilities and restaurants. Management reports that the proposed expansion of a local Wal-Mart and construction of a Lowe's home improvement facility has the potential to generate $500,000 annually in additional sales tax revenue. The village's local economy has a strong presence of auto dealerships (12 all together), which has likely played a role in declining sales tax receipts. Resident wealth indices are above state levels, with per capita income and median family income values at 108.3% and 118.2% of state medians, respectively. The village's unemployment rate of 10.8% in October 2009 was larger than state and national figures (10.5% and 9.5%, respectively).
HIGH OVERALL DEBT BURDEN REFLECTS REGIONAL GROWTH; MANAGEABLE DIRECT DEBT BURDEN
Moody's expects the village's debt burden to remain manageable due to continued moderate tax base growth and limited future borrowing plans. The village's overall debt burden is above-average at 7.1%, likely reflecting recent growth within the region, while direct obligations more manageable at 2.8% of full valuation. Principal amortization is below average, with 51.1% of principal repaid in ten years. Moody's notes, the structure of the Series 2010 debt certificates is relatively weak with principal amortization delayed until 2017. All of the village's debt is in fixed rate mode, and aside from the possibility of restructuring and refinancing current outstanding debt for interest rate savings, the village has no immediate plans to borrow over the near term.
KEY STATISTICS:
2000 Population: 12,928 (13.6% increase since 1990)
2008 Population (census estimate): 17,420 (34.7% increase since 2000)
2008 Full valuation: $1.8 billion
2008 Full value per capita (estimate): $103,694
Overall debt burden (direct): 7.1% (2.8%)
Payout of principal (10 years): 51.1%
2000 Per capita income as a % of state: 108.3%
2000 Median family income as a % of state: 118.2%
Fiscal 2008 General Fund balance: $2.9 million (15% of General Fund revenues)
Fiscal 2009 Un-audited General Fund balance: -$1.1 million (-7.56% of General Fund revenues)
General obligation unlimited tax debt outstanding: $23.2 million
General obligation limited tax debt certificates outstanding: $28 million including current offering
The principal methodology used in rating The Village of Matteson, IL was Moody's General Obligation Bonds Issued by U.S. Local Governments published in October 2009 and is available on
The last rating action was on March 7, 2008, when the village's A1 rating was affirmed.
OUTLOOK:
Assignment of the negative outlook reflects Moody's expectation that the village's deficit General Fund balance and challenges associated with introducing new revenue streams and reducing expenditures may result in a credit profile that is no longer consistent with the Baa2 and Baa3 ratings. The village's ability to successfully implement expenditure adjustments and revenue enhancements sufficient to rebuild operating reserves will be a key factor in future credit reviews.
What could change the rating UP (revision of outlook to stable from negative):
-Implementation of budgetary adjustments leading to restoration of structural balance and improvement in the village's balance sheet.
-Substantial improvement in financial performance evidenced by operating surpluses that yield adequate reserve levels.
What could change the rating DOWN:
-Failure to introduce revenue enhancements or expenditure reductions leading to projections of continued structural imbalance and deficit reserve balances.
-Further erosion of the village's balance sheet in fiscal 2010 or budgetary projections for fiscal 2011 that reflect continued structural imbalance leading to further deterioration of the village's financial position.
