TEXT-Fitch rates Indiana Finance Authority
Oct 19 - Fitch Ratings assigns an 'AA+' rating to the following Indiana Finance Authority (IFA) bonds: --$4,485,000 facilities revenue bonds, series 2012L; --$56,560,000 facilities revenue bonds, series 2012M. The bonds, which will fund the renovation of the Indiana state fairgrounds' Coliseum complex and refund $9.6 million in outstanding 2002 debt related to the fairgrounds, are expected to be sold through negotiation the week of Oct. 22, 2012. In addition, Fitch affirms the 'AA+' rating on outstanding Indiana appropriation-backed debt issued by various state agencies. The IFA was established in 2005. The state's debt structure formerly was diffuse with state appropriation-backed debt issued through several commissions and authorities. The IFA is the successor agency to the former agencies. The Rating Outlook is Stable. SECURITY The bonds are limited obligations of the IFA, secured by biennial state legislative appropriations, although the state expects that state fair commission revenues will be sufficient to pay debt service and general fund revenues will not be necessary for this purpose. KEY RATING DRIVERS --APPROPRIATION SECURITY: Bond payment relies on biennial legislative appropriations, although appropriation risk is mitigated by the state's reliance on appropriation debt to fund its capital program and the requirement of legislative approval for projects and financings. General obligation debt is constitutionally prohibited. --LOW DEBT BURDEN: Indiana's low debt burden is one of the key credit strengths underlying its high rating. A third of the state's net tax-supported debt was issued for a stadium and convention center project and is expected by the state to be self-supporting from earmarked local tax revenues. --HIGH RESERVE LEVELS: Indiana's budgeting has been strong and the state maintained budget balance and a solid reserve position despite weakened economic and revenue performance in the recession. --MANUFACTURING-HEAVY ECONOMY: An economy that remains considerably concentrated in manufacturing, particularly transportation equipment, exposes the state to economic downturns. CREDIT PROFILE The series L bonds will refund $9.6 million outstanding 2002 State Fair Commission fairgrounds revenue bonds. The series M bonds will fund extensive renovation of the existing Coliseum at the fairgrounds and the construction of a new arena adjacent to the Coliseum. The new arena is expected to be complete by Aug. 1, 2013, while the Coliseum renovation is expected to be complete by Aug. 1, 2014. Given that the bonds are payable from biennial state appropriations, the 'AA+' rating rests on the credit quality of the state. The IFA and the Indiana State Fair Commission both commit to seek state appropriations for debt service, although the state expects that commission revenues in fact will be sufficient to pay debt service. Maximum annual debt service is estimate at $4.3 million. The commission, which was created by the general assembly in 1990, consists of eight members, the majority appointed by the governor. Since appropriations are not available unless the projects are available for use, the structure includes some capitalized interest and a requirement for casualty and business interruption insurance. Indiana's credit is characterized by a historical pattern of low debt, balanced financial operations, and a commitment to funding reserves to provide a cushion in times of economic and revenue decline. These strengths are offset by an economy that, despite ongoing diversification, remains heavily concentrated in the cyclical manufacturing industry. Low debt is a principal credit strength for Indiana: the state's net tax-supported debt of $2.9 billion equates to a low 1.3% of personal income. Indiana does not issue general obligation debt, which is constitutionally prohibited. The state meets the bulk of its capital needs through debt issuance by the IFA secured by biennial state lease-rental appropriations. Indiana's budgeting has been strong, with a focus on structural solutions to close budget gaps. After a budget is enacted, the budget agency has significant statutory authority to administer the budget and scale back spending as needed, allowing the state to be responsive to changing conditions. The state maintained budget balance and a solid reserve position despite significant economic and revenue weakening in the recession. Combined fund balances dropped from $1.4 billion at the end of fiscal 2009 (about 11% of operating revenues) to a still meaningful $831 million at the end of fiscal 2010. Revenue results for fiscal 2011 were strong and spending austerity continued with the budget for the current fiscal 2012-2013 biennium. The state reported an increase in balances to $2.15 billion at the end of fiscal 2012, 15% of operating revenues. This is expected to drop only minimally to $2 billion at the end of the biennium on June 30, 2013 despite a $361 million taxpayer refund and supplemental pension funding of the same amount, both triggered by the high fiscal 2012 ending balance. Although the bulk of the state's ending balance is in the form of general fund balance rather than the rainy day fund, it provides a substantial financial cushion for the state. State operating revenue grew a reported 8.9% in fiscal 2011 (unadjusted for the restatements discussed below), with particularly strong performance in personal income taxes (up 18.3%, year-over-year) and 5.1% growth in sales tax revenue. The state reports revenue growth of 6.4% in fiscal 2012 and forecasts a 2.2% increase in the current fiscal year 2013. In the past year, the state has announced two separate and unrelated material restatements of financial information. Specifically, in December 2011 the state reported that due to a programming error, monies from corporate tax e-filings had not been transferred to the general fund although they are general fund monies. This resulted in an additional $288 million to the general fund from monies collected for fiscal years 2007 to 2011 as well as $32 million for fiscal 2012 year-to-date, for a total of $320 million. A subsequent and ongoing internal audit of the Department of Revenue discovered an under-distribution of local option income taxes for calendar years 2011 and 2012 that resulted in state general fund revenue being overstated by $71 million in fiscal 2011 and $135 million for the first eight months of fiscal 2012. Both errors have been rectified. The state has initiated an external audit of the Department of Revenue's systems, processes and procedures, which Fitch believes is important to resolve concerns about internal controls following the errors. Despite ongoing diversification, Indiana's economy remains highly dependent on manufacturing, which makes up about 17% of employment and 22% of earnings in the state compared to 9% and 10%, respectively, for the U.S. As a result, the state is prone to large swings in conjunction with national business cycles. Employment declined 6.7% between 2007 and 2009, well above the 4.9% drop for the nation over that period, and the state's unemployment rate rose to a peak of 10.8% in May 2009. Conditions improved in 2010, with employment growth of 0.3% compared to the nation's 0.7% loss, and again in 2011 when the state saw a 1.2% year-over-year increase, just above the U.S. rate. The 2.2% year-over-year increase for September 2012 compares favorably to 1.4% growth for the nation. The state's unemployment rate of 8.2% is above the national rate of 7.8% for September. Indiana's personal income per capita equals 85% of that of the U.S., ranking the state 41st of the states on this basis.