TEXT - Fitch rates Indianapolis Local Public Improvement Bond Bank
Feb 12 - Fitch Ratings has assigned a rating of 'AAA' to the following bonds to be issued by the Indianapolis Local Public Improvement Bond Bank, IN (the bond bank): --$61.15 million taxable bond bank refunding bonds, series 2013B. The bonds are scheduled for negotiated sale on February 20. Proceeds will be used to refund a portion of the bond bank's taxable bond bank bonds series 2005A. In addition, Fitch affirms the 'AAA' rating on the following outstanding bond bank bonds: --Series 2003D and 2007D multipurpose bonds; --Series 2005A taxable bonds (not refunded with this issue); --Series 2008A ad valorem bonds. The Rating Outlook is Stable. SECURITY The bonds are limited obligations of the bond bank, which under Indiana law is empowered to buy and sell securities of qualified entities such as the city, all special taxing districts in the city, and all entities with tax levies reviewed by the city council. The bond bank has no taxing power. The series 2013B and 2005A bonds are supported by the general obligation and unlimited ad valorem property tax pledge of the city of Indianapolis. The series 2003D and 2007D multipurpose bonds are secured by the requirement of the city, acting through its Board of Public Works, Board of Parks and Recreation, and Board of Transportation, to levy a special tax within the district, which is coterminous with the city. The series 2008A ad valorem bonds are supported by an ad valorem property tax, if needed, levied on all taxable property in the Redevelopment District, which is coterminous with the city, to the extent not paid from other revenues of the Metropolitan Development Commission. KEY RATING DRIVERS STRONG FINANCIAL FUNDAMENTALS: The city's strong management team has prudently accommodated the reduction in tax revenues as a result of statewide circuit breaker legislation and has maintained healthy reserve levels from both recurring and non-recurring sources. MAJOR ECONOMIC CENTER: Indianapolis anchors a deep and diverse employment base that should serve to promote long-term stability and continued commercial development. Income levels in the city are comparable to state averages and slightly below those of the U.S. MANAGEABLE LONG-TERM LIABILITIES: Debt metrics are average and should remain stable. The state's subsidization of a portion of pension liabilities and manageable carrying costs help balance the debt profile. RATING SENSITIVITIES MAINTENANCE OF STRONG RESERVES: The city's maintenance of strong reserve levels with modest use of non-recurring measures will be key to maintaining the 'AAA' rating. CREDIT PROFILE In 1970, the governments of the city of Indianapolis and Marion County were consolidated to form the state's only consolidated city, which provides services generally throughout the county in which the city is located. By the consolidating act, the boundaries of the city were extended to the county line, although the small municipalities of Beech Grove, Lawrence, Speedway and Southport were excluded. Indianapolis serves as the capital and economic center of the state. The city's population has grown 5% since 2000 and currently totals 820,445, making it the largest city in the state and 12th largest by population in the nation. STRONG FINANCIAL POSITION BOLSTERED BY UTILITY SALE Even with numerous tax reduction initiatives at the state level over the last few years, the city's financial position is strong despite some annual operating deficits, supported by prudent financial management. The city has implemented continuous spending freezes and required departments to reduce their budgets by approximately 5% for each of the last five fiscal years. Property and local income tax receipts comprise 52% of general fund revenues. As a result of the circuit breaker tax cap legislation enacted in 2008, which limits property taxes to a percentage of gross assessed value, the city's property tax revenue decreased by $9.3 million in 2011 (1.5% of total revenue), following a $10 million decrease in 2010. Increases in public safety (as a result of the consolidation of township fire departments into the city's fire department) and pension expenses led to a moderate year-over-year 4.0% increase in general fund expenditures. Increases in expenses were offset by cost cutting initiatives, including a decrease in public works operating expenses by $24 million due to the utility system sale to Citizens Energy Group in August 2011. Net of the utility sale, the general fund ended 2011 with a $35 million operating deficit. With the utility system sale, the 2011 (year ending Dec. 31) unrestricted general fund balance increased to $351.5 million or 50% of spending (operating expenses plus transfers out) compared to an unreserved balance of $133.8 million or 19.1% of spending in 2010. The unrestricted balance includes an $80 million (12.5% of 2011 general fund expenditures) fiscal stability fund from proceeds of the sale of the utility system. If thecontroller of the city determines this level of reserves is longer needed to support the city's credit ratings money can be used for future capital projects. These funds cannot be used for operations. PRELIMINARY 2012 RESULTS AIDED BY NON-RECURRING SOURCES To help offset projected income tax declines and avoid a general fund drawdown in 2012 the city budgeted and received a $38.5 million reimbursement from its tax increment district for amounts paid in prior years by the city for capital expenditures. This practice is not typically carried out by the city but available to it. Positively, the property tax circuit breaker loss was about $9.7 million less than budgeted and the state department of revenue announced it had erred in calculations of county income tax distributions to all counties for both 2011 and 2012. The city's share of this additional revenue was $36 million ($18 million of which is attributable to 2011). On a budgetary basis, management estimates an increase of between $26 million to $38 million in city general fund operating reserves for 2012. PLAN TO CLOSE 2013 AND 2014 BUDGET GAPS As a result of some disagreement between the Mayor and Council, a tentative agreement on the 2013 Budget was just reached in January 2013 with a finalized budget expected to be in place by March. The projected $60 million budget gap is expected to be closed through: (1) an increase in tourism tax rates, which is already in effect; (2) a 5% or $30 million cut to general fund appropriations, which requires council approval; (3) a $10 million reimbursement from the downtown TIF, and (4) use of $15 million of reserves. The budget gap for 2014 is estimated to be at least $40 million, a decrease from the 2013 gap because local income tax revenue is expected to jump $20 million, year-over-year, as the state lifts a cap on local income tax distributions to Marion County. This cap, in place for 2012 and 2013, was the result of an over-distribution of local income tax revenue by the state over the period from 2008 through 2010. If general fund operating appropriations are cut $30 million in 2013 and carried forward for 2014, the gap would be reduced to $10 million. Additionally, a homestead credit subsidy may be eliminated for 2014 (pending Council approval), yielding a $9 million increase in general fund operating revenue. Fitch's 'AAA' rating assumes the city will maintain strong reserve levels with modest use of non-recurring measures despite spending pressures and the uncertainty of Council approval of cuts and revenue enhancements. STABLE AND DIVERSE ECONOMY AND TAX BASE The city's economy is well diversified and includes pharmaceutical production, health services, life and sciences companies, manufacturing and other business and professional service companies. Major employers include Indiana University Health (20,292 employees), St. Vincent Hospitals and Health Services (11,075), Eli Lilly and Company (10,500) and Wal-Mart (9,000). Despite its strong economic presence and steady growth - 4,470 new job commitments and $607 million in investment in 2011 - the city experienced a 1.7% decline in employment from November 2011 to November 2012. The November unemployment rate of 8.6%, while down from the November 2011 rate of 9.2%, remains elevated relative to the MSA (7.6%), state (8.0%) and nation (7.4%). Income levels in the city are comparable to state averages and slightly below those of the U.S. Taxable assessed value has been fairly stable over the last few years, totaling $31.6 billion in 2012. The top 10 taxpayers are diverse and comprise a moderate 8.3% of 2011 taxable assessed value. Property tax collections, although generating fewer dollars because of the circuit breaker tax credits, continue to be strong, net of tax credits. MANAGEABLE DEBT PROFILE Overall debt ratios are moderate and should remain stable as the city does not foresee any significant new debt issuance in the next few years and amortization is above average. The city participates in the State's Public Employees' Retirement Fund (PERF) for its police and firefighters hired after April 1977 and in another plan administered by PERF for all other city employees. Plans were well funded as of June 30, 2010 - 93% and 85% for police/fire and other employees, respectively, assuming a 7% rate of return. Contributions made in 2011 totaled $33.1 million or a modest 3.1% of 2011 government fund spending. The state's reimbursement of the city's annual pension contributions for its pre-1977 plan, commencing in 2009, helps offset this growing fixed cost and future liability. The city is making pay-go payments on its other post-employment (OPEB) obligation and paid a modest $1.7 million in fiscal 2011. The unfunded liability was $155 million (0.4% of taxable market value) as of Dec. 31, 2011, assuming a 4% discount rate. Carrying costs including debt and other long-term liabilities related to pension and OPEB consume approximately 16.2% of governmental fund spending which Fitch considers midrange.