City of De Kalb Illinois Rating Update July

City of De. Kalb, Illinois Rating Update July 24, 2017

Moody’s Investor Rating Surveillance Rating • Moody’s downgraded the City’s previous “Aa 3” rating to “A 1” • This is a significant drop because it puts takes the City from the Aa category to the single A category • The rating downgrade is due to higher pension liability based on Moody’s restatement, and dependence on revenues from the State of Illinois • Moody’s will continue to monitor the City • The following conditions could make the rating increase: Expansion and diversification of the tax base Moderation of the City's unfunded pension liability • The following conditions could make the rating decrease: Deterioration in the tax base Material declines in the City’s reserves and liquidity Increase in the City's unfunded pension liability • Moody’s was complementary regarding Financial Operations and Reserves: “Solid Reserves and Improving Financial Position” 1

City of De. Kalb Rating History 2

Rating Categories and Definitions Grade Investment Grade Non-Investment Grade Moody's Aaa Aa 1 Aa 2 Aa 3 A 1 A 2 A 3 Baa 1 Baa 2 Baa 3 Ba 1 Ba 2 Ba 3 B 1 B 2 B 3 Caa Ca C City of De. Kalb State of Illinois City of Chicago Standard & Poor's AAA AA+ AA AAA+ A ABBB+ BBBBB+ BB BBB+ B BCCC+ CCC- Description Extremely strong capacity ot meet financial obligations Very strong capacity to meet obligations Strong capacity but susceptible to adversity Adequate financial capacity but adverse conditions will lead to weakness Non-Investment Grade Speculative Highly Speculative Extremely speculative 3

Calculation of Moody’s ANPL Adjusted Net Pension Liability (ANPL) = Adjusted Liabilities (AAL) - Plan Assets (AVA) AAL Adjustment Fire Police IMRF 62, 792 7. 46% 60, 898 7. 46% 54, 653 7. 46% 4. 34% 159, 997 155, 171 139, 259 454, 428 Discounted at Citibank Pension (000 s) Liability Rate Above 92, 098 89, 320 80, 161 261, 580 Less: Actuarial Value of Plan Assets (000 s) 23, 471 28, 699 44, 692 96, 862 ANPL (000 s) 68, 627 60, 621 35, 469 164, 718 AAL (000 s) Assumed investment rate of return Citibank Pension Liability Index (as of valuation date) AAL Projected Forward 13 years at 7. 5% (000 s) Operating Fund Revenues (000 s) ANPL/GF Revenues Total 178, 343 33, 544 4. 91 4

Moody’s Focus on Pension Liability • Moody’s puts greater focus on annual net pension liabilities (ANPL) which they calculate using their own methodology • The City changed from the Project Unit Cost (PUC) methodology to the more convervative Age Entry Normal method on the actuarial calculation, which is viewed positively by Moody’s however it increases the pension liability • In addition, the City uses a 7. 46% discount rate on future cashflows resulting in an AAL of $178, 343 (000) versus Moody’s who uses a 4. 34% discount rate resulting in a $261, 580(000) AAL • Moody’s looks at this liability divided by annual general fund revenues to come up with a ratio • The City’s ratios of general fund revenues to ANPL is 4. 9 and they state that the median for Aa rated issuers is lower (between 1 and 2) 5

S&P Rating Estimator Overall Estimate 6

Notice and Disclaimer The accompanying information was obtained from sources which William Blair & Company, L. L. C. believes to be reliable but does not guarantee its accuracy and completeness. The material has been prepared solely for informational purposes and is not a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Historical data is not an indication of future results. The opinions expressed are our own unless otherwise stated. Additional information is available upon request. Contact Information: William Blair & Company 222 West Adams Chicago, Illinois 60606 www. williamblair. com Elizabeth M. Hennessy Managing Director ehennessy@williamblair. com Phone: (312) 364 -8955 Fax: (312) 236 -0174 7