2009-02-25 22:51:04 -

In the course of routine surveillance, Fitch Ratings affirms its 'A' rating on the village of Hawthorn Woods, IL's $7.9 million in outstanding unlimited tax general obligation (GO) bonds, series 2003 and 2004 (special service areas one, two and three). The Rating Outlook is revised to Negative from Stable.


The 'A' rating reflects the Hawthorn Woods' ('the village')

wealthy and rapidly growing tax base, relatively high debt levels, and recent fiscal difficulties including two years of operating deficits and a sharp fall in general fund balance. The Negative Outlook reflects Fitch's concerns over the village's ability to restore structural balance given recent fiscal operations. Additional credit concerns are a large unfunded liability in the police pension fund, limited revenue-raising ability, a delayed audit and potential need to restructure future revenue bond debt service due to declines in revenues and fees.


The village is seeking to recover from a prior practice of funding operating budgets with volatile housing development fees which had increased significantly during the real estate boom. The housing downturn drove two consecutive years of operating deficits: including a projected $1.35 million shortfall on a $4.6 million operating budget in fiscal year 2008 (FY08) (29% of budgeted spending). FY08 (ending April 30, 2008) remains unaudited, due to recent management turnover and workload. Recent action by the village's new management team included cutting personnel by 40% (from 35 employees to 21), and diverting all non-recurring and development-related revenue away from the general fund. Management has also budgeted for a partial financial year (May 1 - Dec. 31 2008) to align financial and calendar years, in order to better manage cash flow. The village budgeted for small general fund operating surpluses in both this 'stub' year and FY09, and projects it has entered FY09 with a fund balance of $1.3 million (16% of audited FY07 spending and transfers out). Hawthorn Woods' flexibility for tax-raising is low: the village is subject to the Illinois Property Tax Extension Limitation Law, which limits increases in property tax levies to 5% per year, or the CPI (whichever is lower). The village may levy above this level for up to four years with voter approval.


The bonds are secured by unlimited ad valorem taxes collected in three designated service areas, together making up the entirety of the village. Due to this structure, the bonds are not technically GOs of Hawthorn Woods. This allows the village under state law to issue up to $36 million in GOs. The village has a high overall net debt (3.9% of market value), including $2.8 million in revenue bonds secured by future developer fees and water park revenues. Management is concerned that a prolonged downturn in the housing market and consumer spending might necessitate restructuring of this debt in 2011. The village's small police pension fund is only 47.4% funded. The liability appeared in 2002 due to the village population exceeding 5,000, which under state law rendered its police officers eligible to be 'grandfathered' into a state pension program. The village has prepared a ballot question for April to institute a police pension fund tax.


Hawthorn Woods is a wealthy residential community within Lake County, which boasted the highest per capita income of any county in Illinois at the last census. The median home value in Hawthorn Woods was twice that of the county median at that time. The tax base has grown extremely quickly in recent years, with an average annual growth rate of 12.5% between 2002 and 2007.


Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions and plans to revisit the recalibration in the first quarter of 2009.


Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.








Fitch Ratings

Tom Cowell, 212-908-9130 (New York)

Steve Murray, 512-215-3729 (Austin)

Cindy Stoller, 212-908-0526

(Media Relations, New York)

cindy.stoller@fitchratings.com