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Fitch Affirms Dixon School District No. 170, IL's $1.6MM GOs at 'AA-'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following bonds of Dixon School District No. 170 (IL):

--$1.6 million unlimited tax general obligation bonds at 'AA-'

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the district's unlimited tax ad valorem pledge without limitation as to rate or amount.

KEY RATING DRIVERS

HEALTHY FINANCIAL RESERVES: The district's conservative budgeting is a key credit strength supporting healthy reserves and working cash, mitigating steady declines in enrolment and state aid.

BELOW-AVERAGE SOCIOECONOMIC METRICS: The regional economy is below average as reflected in above-average unemployment rates and weak wealth indicators.

STABLE TAX BASE: The district has benefited from years of assessed value growth. Strong property tax collections and industry diversification among the 10- largest tax payers are viewed favorably.

STRONG DEBT PROFILE: Debt levels are exceptionally low with rapid amortization and limited future needs. Pension and other post-employment benefit (OPEB) obligations are manageable although pension costs will likely grow over the long term, as the state plan is underfunded.

CREDIT PROFILE

WEAK SOCIOECONOMIC INDICATORS PARTIALLY OFFSET BY STABLE TAX BASE

The district is located approximately 95 miles west of Chicago and serves the city of Dixon and the surrounding areas of Lee and Ogle Counties. The regional economy is primarily residential and agricultural with below-average economic indicators. Lee County accounts for 90% of the district's tax base and posted a minimal 0.2% employment growth rate in July 2012 from a year prior, yielding an unemployment rate of 9.5%, higher than the 9.3% and 8.6% rate for the state and nation, respectively. Lee County 2010 per capita personal income equaled 78% of the state average and 82% of the national average.

The district's relatively stable tax base helps partially alleviate Fitch's concerns about the district's limited economy. The district experienced years of equalized assessed value (EAV) growth and growth continued through fiscal 2011, increasing 1.6% compared to the prior year. Although EAV declined in fiscal 2012, the decline was moderate at 2.2%. Management expects EAV to remain generally level over the next several years. Fitch views management's assumption as reasonable given demonstrated growth in EAV during the recent severe housing downturn, suggesting some inherent stability in the base. District management reports foreclosures are insignificant and property tax collections remain strong, at around 100%.

The district has moderately low taxpayer concentration. Duke Energy is the district's largest taxpayer, representing less than 3% of fiscal 2011 EAV and the top 10 taxpayers total 10.5% of fiscal 2011 EAV.

WELL-MANAGED FINANCES

Conservative financial management and planning is an important credit strength and consistently yields ample reserves and financial flexibility. When analyzing the district's finances, Fitch combines the educational and operations and maintenance funds (combined funds). Fiscal 2011 concluded with an unreserved combined fund balance of $5.1 million, equal to a strong 20% of spending. Due to the anticipation of shortfalls in state aid and slow-down in tax base growth, the district employed spending cuts in fiscal 2011 which reduced combined expenditures 5.5% over the prior year.

The fiscal 2012 budget calls for a deficit; however, due to $800,000 the district received from excess health insurance reimbursements, management reports that actual unaudited results show combined reserves at $5.6 million, or 21% of spending. The fiscal 2013 budget projects a decrease in combined reserves to $3.7 million, equal to a lower but still healthy 16% of spending. The projected deficit is being driven by the state prorating general state aid and a modest reduction in property tax revenue due to the recent decrease in EAV. Management typically budgets assuming a worst-case scenario, and actual results historically outperform budget. The district adopted a fund balance policy in 2012 to maintain unassigned fund balances at levels to provide sufficient working capital and a margin of safety to address local and regional emergencies without borrowing. Fitch views the policy as credit neutral given the general nature of the requirement.

The district maintains a sizeable working cash fund outside of the educational and operations and maintenance funds totaling approximately $3.4 million in fiscal 2011. This reserve can be used for interfund loans to facilitate intrayear liquidity. Currently, interest earnings are swept from the working cash fund to the educational fund. Any other use of the funds requires board approval. To date, the district has not had to use funds from the working cash fund. The working cash fund had a balance of $3.6 million in fiscal 2012 (unaudited) and the estimated balance is $3.7 million in fiscal 2013.

FAVORABLE DEBT BURDEN

Debt levels are low, with overall debt equaling 0.6% of market value and $277 per capita. Amortization is rapid, with 100% of principal retired in 10 years. The district reports only one major capital project in the works, a discretionary multi-use facility. Construction is contingent upon the successful passage of a sales tax referendum on the ballot this November. The ballot measure proposes a 1% increase in the current county-wide sales tax with utilization of the additional revenue limited to facility use or the abatement of debt service. If passed, management reports that the increased sales tax will provide $1 million in additional revenue for the district annually, with no sunset provision. If the measure fails, management plans to fund on-going maintenance from operations.

Pension and OPEB obligations do not pressure the credit. The district participates in the state plans. The state largely makes payments on behalf of the district and any payments made by the district are low, totaling under 3% of operating spending. When adding in debt service, carrying costs for pension, OPEB and debt service is still low at 6.5% of combined fiscal 2012 expenditures. Fitch notes that funding levels for the state plans are low and that the district's contributions are likely to increase over the long term.

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, IHS Global Insight, and the National Association of Realtors

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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Fitch, Inc.
Primary Analyst
Nicole Wood, +1-212-908-0735
Associate Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Bernhard Fischer, +1-212-908-9167
Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings