Fitch Rates Indianapolis Local PIB Bank, IN's $53MM Ad Valorem Tax Bonds 'AAA'
--$53 million ad valorem special benefits tax refunding bonds, series 2016B
The bonds are scheduled for sales via negotiation on Oct. 5, 2016, and proceeds will advance refund the series 2008A bonds for savings.
In addition, Fitch has affirmed the following Indianapolis ratings:
--Issuer Default Rating (IDR) at 'AAA';
--$52.5 million ad valorem special benefits tax bonds at 'AAA';
--$88.6 million unlimited tax general obligation (GO) bonds at 'AAA'.
The Rating Outlook is Stable.
The series 2016B bonds are limited obligations of the Indianapolis Local Public Improvement
Bond Bank (the bond bank), which under Indiana law is empowered to buy and sell securities of qualified entities including entities such as the City of Indianapolis (the city), Marion County, all special taxing districts in the city, and all entities with tax levies reviewed by the city-county council. The bond bank itself has no taxing power. The bonds are payable from an ad valorem special benefits tax levied on all taxable property in the special tax district (the district), which is coterminous with the city of Indianapolis, to the extent not paid by other revenues of the Metropolitan Development Commission, the district's governing body.
KEY RATING DRIVERS
The city's 'AAA' GO rating and IDR reflect its substantial independent revenue-raising ability, solid expenditure flexibility, low long-term liability burden, and very strong financial flexibility.
The 'AAA' rating on the 2016B ad valorem special benefits tax bonds reflects the requirement of the City-County Council of Indianapolis and Marion County (the city-county council) to levy an ad valorem special benefits tax, if needed to pay debt service, on all property in the district, which is coterminous with the city of Indianapolis. The council expects to pay debt service from tax increment revenue or other legally available revenues, which the city-county council projects will be sufficient to cover annual debt service on all obligations including series 2016B bonds, by a minimum of 1.39 times throughout the life of the bonds. Fitch believes the city-county council would levy the ad valorem special benefits tax in a timely manner if required to support debt service.
Economic Resource Base
Indianapolis is the largest city in the state of Indiana, with a diverse economy bolstered by its role as the state capital. The current population of 853,173 reflects a 4% increase since the 2010 Census. Employment growth has been positive since 2011 (including 2% and 3.3% growth in 2013 and 2014, respectively), well above the U. S. national average. Wealth and unemployment rates are on par with the state and just below national averages.
Revenue Framework: 'aaa' factor assessment
Revenue growth is expected to remain above the rate of inflation, as it has historically, based on ongoing improvement in the local economy. The city has significant ability to increase local option income taxes to ensure ongoing fiscal stability.
Expenditure Framework: 'aa' factor assessment
Fitch believes that the city's natural rate of expenditure growth will be in-line with revenue growth. The city has solid capacity to cut spending if necessary, due to moderate carrying costs for debt service and pension obligations and a labor environment that provides flexibility to management
Long-Term Liability Burden: 'aaa' factor assessment
The city's long-term liability burden including pension liabilities and overall debt is low relative to personal income.
Operating Performance: 'aaa' factor assessment
The city has exceptionally strong gap-closing capacity and solid general fund reserves to manage through a moderate economic downturn. Fitch expects the city to maintain stable financial operations based on its ample revenue-raising capacity and solid expenditure flexibility.
The 'AAA' IDR and Ad Valorem ratings are sensitive to the city's strong willingness to increase operating revenues to maintain structurally balanced general fund operations. General fund reserves are strong, but, sharp declines in general fund reserves could potentially pressure the current rating.
The regional economy benefits from its size and diversity. The city is home to numerous industries including pharmaceuticals, health services, logistics, manufacturing and other professional services. Major taxpayers include Eli Lilly and Company, Federal Express, and American United Life Insurance Company. The largest employers St Vincent Hospital and Health Services and Indiana University Health employ approximately 17,398 and 11,810, respectively. The city's taxable assessed valuation has been relatively flat since 2008, but the region had a large uptick in residential building permits issued in 2015. The city's long-term economic planning efforts should provide an intermediate-term boost to the tax base and the employment rolls. In 2015, Rolls Royce announced plans to invest $600 million to upgrade its Indianapolis operations, which is expected to spur economic activity and create additional aerospace jobs.
The majority of the city's general fund revenues are derived from local sources including property taxes and income taxes, which account for 62% of total general fund revenue combined. Fees and charges for services comprise about 12%, followed by intergovernmental revenue.
Fitch believes that natural revenue growth, without taking into account increased income tax rates, will continue to perform above the rate of inflation, as it has historically from 2005 through 2014. The 2008 housing market downturn and resulting limited growth in taxable assessed values (TAV) coupled with the implementation of a state tax cap led to flat property tax levies. The 'circuit breaker' tax cap guarantees that property tax rates are limited to a percentage of gross assessed value depending on the property classification. Residential properties, which account for 43% of 2015 total taxable assessed value (TAV) are capped at a 2% and commercial, industrial, personal properties (54% of total TAV) at 3% and homestead properties are capped at a 1%. Under the tax cap, the city expects modest increase in property taxes due to improvements in the TAV, which will likely approximate inflation.
Recent income tax improvements reflect economic growth attributable to upticks in employment and personal income. Income taxes increased by 25% in 2015 partially driven by rate increases; however the county attributes 7.1% of the overall increase to natural growth. Fitch anticipates natural revenue growth will continue to be solid based on the trend of improved income tax collections, steady population growth and ongoing economic development.
Fitch views the city's ability to independently increase revenue as significant. The city-county council has the option to increase local option income tax rates to a maximum rate of 2.75%. Local option income tax increases can be imposed by County Income Tax Council (CITC), which is composed of the city-county council. The city-county has over 90% of the voting representation and the fiscal bodies of each town or city within the county which accounts for less than 10%. In 2015, the city increased the public safety income tax rate to the maximum rate of 0.50% from 0.35% which generated $16 million in increased operating revenue. Additionally, the city increased charges for services including fees for storm water fees which generated approximately $7 million in 2015, 1.3% of general fund revenue.
The largest portion of the city' general fund expenditures are dedicated to public safety including criminal justice, police and fire service. The remaining expenditures are for public works, culture and recreation and capital expenditures.
Fitch expects expenditure growth to exceed expected revenue growth absent policy action. The city's growth in expenditures is largely driven by labor force salary increases and employee benefits costs, which account for 60% of general fund expenditures. The average increase in employee salaries and benefits has grown at a pace above inflation.
Flexibility of main expenditure items is solid given the city's ability to control expenditure growth under the current labor environment. Management is implementing an initiative to curtail personnel costs and reduce the size of the workforce mainly through employee attrition. Under the city's current labor agreements, unions are not subject to binding arbitration and management has strong control over staffing levels. The City Controller has the flexibility to reduce an agency budget to create budgetary balance if revenues are less than budgeted expenditures under a state statute. The city did not utilize this option in the 2017 budget because of the city's active management of expenditure growth through cost reductions.
Carrying costs for debt service, annual pension costs and other post-employment benefits (OPEB) contributions account for 22% of general fund expenditures. Since 2009, the state has reimbursed the city for the annual pension payments for the Pre-1977 police and fire pension plans. After adjusting for the state reimbursement, carrying cost are solid at 17% of general fund expenditure. Capital projects funded within the general fund provide additional expenditure flexibility because the city can delay projects for budgetary relief, as was done during the recession. In 2015, the city spent $58 million, 9% of general fund expenditures on capital projects.
Long-Term Liability Burden
The city's long-term liabilities are low with the combined net pension liability and overall debt at 7.5% of personal income. The majority of the long-term liability burden is direct debt, which is expected to remain low because the city has limited future borrowing plans.
The city participates in four separate pension plans: two pre-1997 Police and Firefighter pension plan, the 1997 Police and Firefighters Statutory plan (Statutory) for employees hired after April 1977 and the Indiana Public Employees Retirement Fund (PERF) which covers all other employees. The Statutory and PERF pension plan's net assets to accrued actuarial liabilities is 103.6% and 77.35%, respectively, using a 6.75% rate of return on assets as of June 30, 2015. Beginning in 2009, the state began reimbursing the city's annual pension contributions for its pre-1977 plan helping to offset the future liability. Despite this reimbursement, the Pre-1977 pension plans net pension liabilities are reported on the city's statement of net assets.
The net other post-employment benefits (OPEB) liability as of Dec. 31, 2015 was $166 million. The city funds OPEB on a pay-as-you-go basis.
Fitch believes that the city's financial resilience is significant given ample available general fund reserves, solid ability to independently increase revenues and solid expenditure flexibility. In 2011, the city's general fund balance increased significantly after the sale of the water utility. As a result, the city transferred $80 million to a fiscal stability fund in support of general fund operations. In June 2016, the city passed an ordinance to maintain the available general fund balance at 17% of general fund expenditures. General fund reserves have historically exceeded the 17% target despite the use of reserves for capital expenditures. Fitch anticipates that based on the exceptionally strong gap closing ability the city will maintain reserve levels above the 'aaa' reserve safety margin in a moderate stress scenario.
Fitch believes that the city has made consistent efforts to maintain healthy financial operations given management's history of increasing local income taxes to offset property tax losses in the city's operating funds and increase revenues. This initiative benefited the city by improving roads and other infrastructure to enable future economic growth in the local economy. Despite the draws on available general fund balance the city maintains ample financial flexibility.
Available general fund balance in 2015 was $168 million, 25.9% of general fund expenditures, well above the 17% available fund balance policy target. Based on projected 2016 results, the city anticipates ending the year with a $218 million total general fund balance, more than 33% of general fund expenditures including an available general fund balance of approximately 26%. Fitch expects the city's financial operations to remain strong given the city's commitment to reduce its labor force, history of increasing revenues as needed and its formalized fund balance policy.