FITCH RATES METROPOLITAN WATER RECLAMATION DIST OF GREATER CHICAGO, IL GOS 'AAA'; OUTLOOK STABLE

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1 FITCH RATES METROPOLITAN WATER RECLAMATION DIST OF GREATER CHICAGO, IL GOS 'AAA'; OUTLOOK STABLE Fitch Ratings-New York-03 December 2014: Fitch Ratings has assigned an 'AAA' rating to the following Metropolitan Water Reclamation District of Greater Chicago (the district) bonds: --$100 million general obligation unlimited tax (ULTGO) capital improvement bonds, 2014 series A; --$50 million ULTGO (alternate revenue source), 2014 series B; --$75 million LTGO capital improvement bonds, 2014 series C; --$75 million LTGO refunding bonds, 2014 series D. The bonds will finance various sewage treatment and stormwater management related capital projects and refund the maturities of the GO capital improvement bonds, limited tax series of July 2006 for present value savings. The bonds are expected to price the week of December 15th. Fitch has also affirmed the following district ratings at 'AAA': --$ million outstanding ULTGO bonds; --$1.13 billion outstanding LTGO bonds. The Rating Outlook is Stable. SECURITY The ULTGO bonds are secured by the district's full faith and credit and its ad valorem tax, without limitation as to rate or amount. The LTGO bonds are secured by the district's full faith and credit and its ad valorem tax, without limitation as to rate but limited as to amount pursuant to the property tax extension limitation law. KEY RATING DRIVERS LARGE, DIVERSE ECONOMIC BASE: The district serves the deep and diverse Chicago metropolitan area, which acts as the economic engine for the Midwest region. The area features abundant employment opportunities in a wide variety of sectors, and continued economic growth is supported by the region's vast infrastructure network. SOUND FINANCIAL PROFILE: Financial operations are structurally balanced and the district retains a significant amount of revenue raising flexibility beneath its operating and limited tax debtservice levies limitation. MANAGEABLE DEBT LOAD: Aggregate debt levels are currently easily managed although principal amortization is slow, and future capital needs are substantial. PENSION FUNDING IMPROVEMENT: The district's pension system is weakly funded, due to the prior statutory framework which did not allow for adequate funding on an actuarial basis. Legislation passed in 2012 allows for greater annual contributions and has begun to improve the funded ratio. STRONG MANAGEMENT: The district benefits from seasoned management with a history of prudent financial stewardship.

2 ULTGO AND LTGO RATINGS ON PAR: The limited and unlimited tax bonds are rated on parity as currently there are no practical differences as to the district's legal ability to collect sufficient taxes to pay debt service. RATING SENSITIVITIES CONTINUED STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices and improved pension funding. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely. CREDIT PROFILE The district is an independent government encompassing 91% of the land area and 98% of the equalized assessed valuation (EAV) of Cook County (rated 'A+' with a Negative Outlook by Fitch). It provides wastewater treatment services to an equivalent population of million people located in the city of Chicago and 125 suburban municipalities. The district has no direct control over wastewater collection and transmission systems maintained by local governments within the county, but it does control sewer construction and expansion through the permitting process. Wastewater is transported to the district's seven treatment plants through a network of interceptor sewers and force mains that connect to local municipal sewer systems. The district's remaining treatment capacity is adequate at 35% with average daily treatment at 1.3 billion gallons per day (BGD) compared to 2 BGD treatment capacity. In addition, the district operates a system of underground tunnels designed to store combined sanitary overflows during wet weather periods to prevent untreated discharge. The district's efforts at stormwater management have taken on a higher priority in recent years. The district's second stormwater reservoir is scheduled to open in LARGE, DIVERSE ECONOMIC BASE The local economy is anchored by the economic and cultural hub of Chicago and its surrounding bedroom communities. The district's levy year 2013 EAV is 30% lower than the 2009 figure, reflecting declines suffered during the recent economic downturn. The tax base has been slow to recover, in large part due to a lag in assessments and the three-year re-assessment cycle. The district is projecting a 2% increase for levy year 2014 and a 3.5% increase for levy year 2015, based upon recent economic activity. County wealth indicators are generally on par with the statewide averages, as the affluent suburban population offsets the urban core. The county, which represents about 40% of the statewide economy, is recovering from the recent recession. The September 2014 unemployment rate of 6.5% is markedly lower than the 9.1% recorded a year prior, and is now only marginally higher than the state rate of 6.2%. Favorably, the drop in the county's unemployment rate is a result of strong employment growth combined with a modest decline in the labor force. SOUND FINANCIAL OPERATIONS The district's positive financial profile is underscored by the stability of its property-tax-dependent revenue stream as well as its limited operational responsibilities and demonstrated expenditure flexibility. The district recorded substantial net operating surpluses, after transfers, in fiscals 2011 and A planned $30 million draw in fiscal 2013 is attributable to a discretionary, supplemental $30 million pension contribution, which Fitch considers a prudent use of the district's substantial resources. The negative unrestricted general fund balance results from the district's policy of reserving the entire amount of its working cash fund, which is contained within the general fund. This working cash balance is intended to provide liquidity in the ensuing fiscal year, is available for general operations, and is not suggestive of an accumulated deficit.

3 The district's revenue stream is highly dependent upon property taxes, which provided 67% of general fund revenues in fiscal Charges for services account for another 20% of the revenue stream. Annual increases in the operating tax levy are limited under the Property Tax Extension Limitation Act to the lesser of 5% or the consumer price index. The district's increases have consistently been below the legally allowable maximum, demonstrating a measure of financial flexibility. The district's 2015 budget is operationally balanced and continues the district's recent practice of including pension and other post-employment benefit (OPEB) payments that overfund the respective annual required contribution (ARC). The district's board passed a policy in 2014 that formalizes its intent to continue making the maximum possible contribution to the pension system. Labor contracts with the district's six collective bargaining groups are settled through June 30, 2017 and include 3% annual wage hikes and health care plan design changes. Electricity costs, a major component of the operating budget, are locked in with long-term contracts through MANAGEABLE DEBT LOAD Direct debt levels are modest at $521 per capita and 0.7% of market value. Substantial overlapping borrowing results in a more moderate overall debt burden of $4,180 per capita or 5.3% of market value. Principal amortization is slow with 36% repaid within 10 years. Future capital needs are significant. The district recently reprioritized its five-year capital improvement plan (CIP), applying different technologies to moderate costs. The district-funded portion of the CIP amounts to $1.28 billion. Annual spending for the plan averages $200 million- $250 million per year, which Fitch estimates will raise direct debt levels to over $2,100 per customer or $650 per capita. The majority of the plan will be funded through the state revolving fund (SRF) borrowing. The district recently received a commitment from the state SRF for loans of up to $200 million per year through 2017 which will allow the district to fund its capital program, including its Tunnel and Reservoir Plan (TARP), with favorable interest costs. WEAK PENSION FUNDING EXPECTED TO IMPROVE The district's single-employer pension plan is weakly funded at 54%, or an even weaker estimated 50% when adjusted by Fitch to reflect a 7% discount rate. The below-average funded ratio has historically been driven by the prior statutory pension funding framework, which restricted employee contributions to 9% and employer contributions to an amount equal to the total of the employee contributions two years prior, multiplied by a factor of These restrictions resulted in the district underfunding its annual pension contribution (APC) by half. Legislation passed in 2012 has begun to ameliorate the situation, however, as tier one employee contributions increased to 10% in 2013, 11% in 2014 and will be 12% in 2015; the maximum employer portion multiplier is changed to 4.19 from Under the new statute, the minimum the district can contribute is an amount that would produce 90% funding by The district board has passed a policy defining the minimum contribution as being sufficient to produce 100% funding in The district's unofficial policy is to contribute the maximum allowed under the framework; the district overfunded the ARC in fiscals 2013 and 2014 and intends to continue to do so. Actuarial projections show that if this practice is continued, full funding should be achieved by Other post-employment benefits are also provided to retirees, whereby the district pays 67.5% of the eligible retiree's annual healthcare premium. The district has established and is contributing to an OPEB trust which the district anticipates will reach 50% funding by the close of fiscal The district's policy goal is to achieve full funding by Overall carrying costs for debt service, pension ARC and OPEB ARC were elevated at 35.9% of spending in fiscal 2013; carrying costs were an even higher 40.8% of spending counting the extra pension and OPEB payments, over and above the ARC, reflecting the accelerated retiree benefit amortization schedule and the limited scope of the district's operations.

4 Contact: Primary Analyst Arlene Bohner Senior Director Fitch Ratings, Inc. 33 Whitehall Street New York, NY Secondary Analyst Adrienne Booker Senior Director Tertiary Analyst Bernhard Fischer Director Committee Chairperson Jessalynn Moro Managing Director Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) , Additional information is available at ' 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, 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 U.S. Local Government Tax-Supported Rating Criteria ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,

5 COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.