As the village of North Riverside prepares to issue $7 million in debt certificates as part of the deal to bring Costco to town, Moody’s Investors Service has downgraded the village bond rating citing concerns over its financial position.

Moody’s on Feb. 19 assigned the village an A1 rating overall, with a lower A2 rating for debt certificates, which are not backed by a dedicated tax levy. The designation of A1 puts the village in what Moody’s terms an “upper-medium grade” long-term rating and a low credit risk. As recently as 2011, the village’s bond rating was Aa2, a “high-quality” rating and considered a very low credit risk.

“The A1 issuer rating reflects the village’s moderately sized tax base with declining valuation trends and substantial taxpayer concentration; a satisfactory financial position but reduced future financial flexibility due to upcoming debt service and pension payments; and an average debt burden,” Moody’s stated in its rating action report issued last week.

According to North Riverside’s finance director, Sue Scarpiniti, the sale of the debt certificates is expected to take place during the first week of March, simultaneously with Costco closing the sale on the property. The sale was to have taken place Feb. 28, but has been delayed.

Scarpiniti said last week that the village did not know what the interest rate on the debt issuance would be or how many years the village would spread out the debt service. That information will be known later this week, she said.

The debt issuance is a key incentive the village is providing to lure Costco to 26th Street and Harlem Avenue. The village board has approved giving $6.8 million to the owners of the property to help cushion the loss they would have otherwise taken on the sale to Costco.

According to a business district redevelopment agreement passed by the village board on Feb. 4, Costco is paying $5,550,000 to purchase 16 acres of the roughly 20-acre parcel of land that formerly housed the Edward Don Company.

A real estate partnership bought the entire property from a branch of the Don family in 2007 for $14.75 million. According to a document in the redevelopment agreement, the partnership owes $10.25 million on the loan for that purchase.

North Riverside’s contribution will bridge the gap between what’s owed and what Costco is paying for the land. It will also help the real estate partnership pay for a deal to release a restrictive covenant on the land and other costs related to the property sale.

While Moody’s downgraded the village’s credit rating, the agency acknowledged changes North Riverside has made since the last debt certificate issuance in late 2011.

On Feb. 18, in addition to approving the issuance of the debt certificates, North Riverside also passed an ordinance establishing a general operating fund balance policy. That policy states that the village will seek to have between three and six months of budgeted operating expenditures in reserve at the end of each fiscal year. For the fiscal year ending April 30, 2012, that would have meant having a fund balance of between $3.2 and $6.4 million.

The village’s unassigned general fund reserves have fluctuated in recent years, falling to as low as $871,000 in 2007. Those reserves have recovered since then, due to a combination of cost cuts from 2009 to 2012 and higher-than-expected revenues in 2012.

North Riverside, according to the 2012 financial audit of the village, has nine fewer full-time employees than it had in 2008. Between 2010 and 2012, the village reduced full-time police staffing by five and fire staffing by two.

During the 2012 fiscal year, meanwhile, North Riverside increased its unassigned general fund balance to about $4.1 million after posting a roughly $700,000 operating surplus that year, according to the audit.

But the village is still struggling to make contributions to its police and fire pension funds. Last year, for the first time in four years North Riverside made a partial contribution to its police and fire pension funds, totaling $250,000. To fully fund the village’s pension obligation, North Riverside would have to contribute about $1.5 million annually.

Scarpiniti said the village will make another contribution to the pension funds in 2013 or at least $250,000, possibly more, depending on financial projections in March.

“It’s still a very serious topic of conversation among the board,” Scarpiniti said.

And then there is the subject of the village’s long-term debt. In 2006, it was pegged at about $1.8 million. In 2012, the village issued $3.59 million in debt certificates to fund water meter replacement, to pay off a bank loan it otherwise would have defaulted on and to restructure other debt.

With another $7 million debt issuance in 2013, North Riverside’s long-term debt will grow to about $10 million. Its legal debt limit is about $23 million.

The village plans on paying the debt service on the 2013 debt certificates using sales tax proceeds from the new Costco store.

“That will be more than enough to cover the debt issue,” said Scarpiniti.

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