Fitch Rates City of Chicago, IL's $40MM (City Colleges) GO 'AA'.

CHICAGO -- Fitch has assigned an 'AA' rating to the City of Chicago, Illinois' $40,000,000 general obligation (GO) bonds, City Colleges of Chicago Capital Improvement Project, series 2007. Fitch also affirms the 'AA' rating on $6.1 billion of outstanding GO bonds. The bonds are expected to price February 28 through a syndicate led by Apex Pryor Securities. The city's full faith and credit pledge backs the bonds and is not an obligation of the community college district. The bonds will finance a new campus for the Kennedy-King College ($30 million) and complete renovations for Malcolm X College ($10 million). The Rating Outlook is Stable.

The 'AA' rating reflects Chicago's diverse economy with limited volatility, improved financial performance and position, and improved financial flexibility due to the establishment of sizable financial reserves. The improved financial position is associated with the sale of the Chicago Skyway concession ($1.8 billion), which enabled debt reduction and the formation of long-term budgetary reserves. The new budgetary reserves include a $500 million perpetual reserve fund and a $375 million mid-term reserve fund, both of which will produce steady interest income streams. As the city maintained its reserves, it countered cyclical weakness in tax growth with sales tax increases, personnel reductions, and broad-based cost-cutting. All labor bargaining groups have renewed their contracts which expire June 2007.

The City Colleges of Chicago is a public community college district consisting of seven colleges and has a tax base coterminous with the City of Chicago. Unlike the city, the district is not a home rule form of government. The district has an eight-member board of trustees appointed by the mayor of Chicago and approved by the city council. The bonds will supplement the capital program of the district and represent the remaining bond authorization. Although the district has additional capital needs, it will not proceed with additional projects before it secures capital funding.

Chicago has experienced less growth volatility as the service sector has expanded at a faster pace than manufacturing. While manufacturing remains a vital component in the city's makeup, its size more closely resembles national industry distribution. Underlying the stability of total citywide employment is a shift in recent years toward service jobs as manufacturing declined. Nevertheless, after a period of steady employment growth, city unemployment rates increased from a previous low of 5.5% in 2000 to 8.2% in 2002. The combination of labor force declines with stable employment levels subsequently lowered the unemployment rate to 7.0% in 2005. More recently, the rate, unadjusted for seasonality, decreased to 4.3% in December 2006, from 6.2% in December 2005.

The city achieved its long-term record of financial stability by strong economic growth and limiting overall budget growth to inflationary rates. The property tax base has grown 6.9% annually since 1995. As property tax levies grew moderately, the city implemented various user charges to capture consumption-based economic activities. Nevertheless, as a home rule city, Chicago has enhanced its revenue-raising flexibility with continued economic growth: since 1995, property values have grown 11.3% annually and residential construction remains strong.

With economic broadening and a diverse tax revenue stream supporting a stable financial picture through 2002, as general fund reserves represented 5.6% of expenditures, weaker economic growth in 2003 reduced the reserves to 2.3%. The administration responded promptly to potential shortfalls by making significant expenditure reductions, including a hiring freeze, personnel reductions, and broad-based programmatic cuts. Although tight budget conditions continued through 2005, reduced spending enabled a general fund surplus which increased the general fund reserve to $110.8 million in 2005, or 4.0% of expenditures. Increased city sales tax (0.25%) and hotel tax (0.5%), combined with better-than-expected results in sales, income and transactions taxes, helped lift general fund reserves in 2005.

Preparing for compliance with Governmental Accounting Standards Board Statement 45 for retiree healthcare benefits, actuaries have calculated that the preliminary liability as of December 2006 will not exceed $1.4 billion. The estimate reflects an existing settlement with the city's retired employees to pay a portion of the city's defined benefit healthcare plan, which expires June 30, 2013. Since the accounting standard is not required until fiscal 2007, the city administration has not developed a financing plan.

While using both internal and external financing resources, the city has kept its debt burden stable. Direct debt equals $2,196 on a per capita basis and 2.4% of property market values; including the debt of the Chicago Board of Education and other overlapping entities, total debt equals $4,888 per capita and 5.3% of property market values. Future tax-supported debt is expected to be modest as city enterprises continue to raise capital supported by user fees and non-property-tax sources. Chicago's four defined-benefit pension plans combined are funded at 61% of liabilities at historical cost through December 2005.

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