Fitch Affirms Indianapolis Local Public Improvement Bond Bank, IN Rfdg Bnds at 'AA-'
OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-'rating on the following bonds:
--$11.4 million Public Improvement Bond Bank refunding bonds, series 2014C.
The Rating Outlook is Stable.
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 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 tax increment (TIF) revenues generated within two separate allocation areas, previously established in the city's Fall Creek/Citizens Consolidated Redevelopment Area, which is located within the redevelopment district. The bonds are additionally supported by a cash-funded debt service reserve fund (DSRF) funded to maximum annual debt service (MADS) and a city moral obligation pledge to replenish draws on the DSRF.
KEY RATING DRIVERS
CITY MORAL OBLIGATION PLEDGE: The city's moral obligation elevates the TIF rating due to the city's strong financial profile and regular use of moral obligations as part of its capital program. Fitch rates the city's general obligations (GO) bonds 'AAA' with a Stable Outlook.
SOUND COVERAGE; WEAK ABT: Debt service coverage (DSC) from TIF revenues is sound. Fitch believes that legislative limitations on taxable assessed value (TAV) and tax rate growth minimize the likelihood of significant increases in DSC. The additional bonds test (ABT) is weak at 1.25x.
WEAK PLEDGED REVENUES: TIF revenues are derived from a small, residential area of the city with a relatively weak economic profile.
CHANGE IN THE CITY'S GO RATING: Deterioration in the credit quality of the city could negatively affect the value of the moral obligation pledge.
MAINTENANCE OF ADEQUATE DSC: Fitch expects the TIF district to limit leverage, keeping DSC around the currently sound level to offset concerns about the small project area, as well as potential reductions to TAV. Fitch believes these factors limit the rating to its current level.
SMALL RESIDENTIAL AREA
The 160-acre redevelopment area is comprised of approximately 1,000 primarily residential parcels, located near the northeast side of downtown. The allocation areas had four phases of development. Phases 1, 2 and 3 are fully built out. Phase 4, which was implemented during the recession, still has some vacancy.
TAV increased by 3.2% to $91.7 million in 2015 from $88.5 million in 2014. This follows a 2013 reassessment which resulted in a 20% increase in TAV. There are currently no tax abatements in the TIF district.
As a largely residential project area, taxpayers are diverse, with the 10 largest property taxpayers representing approximately 4.7% of TAV. The redevelopment area includes two allocation areas: Fall Creek/Citizens Consolidated Housing Tax Increment Financing Allocation Area (80% of TAV), and Fall Creek/Citizens Consolidated East Housing Tax Increment Financing Allocation Area, established March 1, 1990 and March 1, 2005, respectively.
ADEQUATE DEBT SERVICE COVERAGE
Assuming 2015 estimated TIF revenues and no change in TAV through bond maturity (2028), projected DSC on the 2014C bonds is sound at 2.1x MADS. Debt service is relatively level, so projected coverage on an annual basis is comparable to MADs.
There are no plans to issue additional parity debt. The weak ABT requires independent certification that the estimated TIF revenue covers the MADS requirements on any outstanding bonds, plus any proposed additional bonds by at least 1.25x.
CITY'S MORAL OBLIGATION PLEDGE ELEVATES THE RATING
The city's strong credit quality and high financial flexibility coupled with its ordinance to consider the appropriation, if necessary, supports the bonds' 'AA-' rating. In the event TIF revenues prove to be insufficient, resulting in a draw on the DSRF, the chairman of the bond bank will certify the deficiency to the city-county council of the city and Marion County by December 1 of each year. The city-county council may, at its discretion, appropriate sufficient funds to restore the DSRF to the required level under the indenture. Fitch believes that the December 1st deadline ensures sufficient time to replenish the debt service reserve prior to the February 1 payment date.
Fitch considers the city's regular use of the moral obligation as a motivation to honor it in order to preserve its reputation in the capital markets. However, Fitch also recognizes that this project covers a limited geographic area with a small population as compared with other projects financed by the city using its moral obligation.