NEW YORK--()--As part of its continuous surveillance effort, Fitch Ratings affirms the implied general obligation (GO) rating of the City of Indianapolis, IN at 'AAA'. As a result, it is affirming its 'AAA' rating on the following Indianapolis Local Public Improvement Bond Bank (bond bank) revenue bonds:
--$76.7 million taxable bond bank bonds series 2005A.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
--The City of Indianapolis-Marion County's (the city) strong management team has prudently managed the reduction in tax revenues as a result of the state wide circuit breaker legislation and changes in assessed valuation methodologies.
--The city maintains an above-average level of reserves which will help mitigate the financial pressure that persists in fiscal years 2011 and 2012 as income tax revenues are expected to be down from prior years.
--The city's economy remains diverse and continues to experience growth through new commercial development.
--Overall debt levels are moderate, and the state's takeover of a portion of pension liabilities and manageable retiree healthcare obligations help balance the debt profile.
--Unemployment levels are slightly below state averages and wealth indicators remain generally below average.
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 itself has no taxing power. The bonds are not general obligations of the city, but the underlying qualified obligation purchased by the bond bank with proceeds of the bonds is supported by the general obligation and unlimited ad valorem tax pledge of the city of Indianapolis which Fitch rates 'AAA'.
Indianapolis is the state's capital city and with 820,445 residents, it is the 13th largest by population in the nation. The Indianapolis economy is well diversified and includes pharmaceutical production, health services, life and sciences companies, manufacturing and other business and professional services companies which continue to lead the employment and city's industrial output. Development in the city has been ongoing increasing the city's ability to generate tax revenues and increase employment opportunities. The city's population has grown 5% since 2000 equivalent to the county growth and slightly below the state's increase of 6.6% for the same period. Wealth levels for the city approximate county and state averages but represent just 88% of national averages. Metro area income levels continue to exceed national averages.
Despite numerous tax reduction initiatives at the state level, the city's financial condition is strong supported by prudent management, manageable budget growth and a diverse revenue and tax base. After several fiscal years of property tax collection delays across the state due to a large number of legal changes to the property assessment system, the property tax billing cycle returned to normal for the city eliminating the need for additional tax anticipation notes in fiscal 2010.
Because of the circuit breaker tax cap legislation enacted in 2008 and changes in the property assessment methodology for commercial property, the city estimates loss in property tax revenues of $26 million for 2011, following a $10 million decrease in fiscal 2010. For 2012, the city is projecting a loss of $22 million. The city has made continuous spending restraints and required departments to reduce their budgets for each of the last four fiscal years resulting in annual savings of $10 million. Buffering the decline in property tax revenues was an increase in local income taxes of $70 million in 2010.
For fiscal year 2010, the city's general unreserved fund balance declined to $134 million from $163 million in 2009 representing 19% of spending down from 27% in 2009 but exceeding fiscal 2008's level of 14%. The decline was due primarily to one-time capital costs. Financial challenges continue for fiscal 2011 and 2012 as local income tax revenue distributions, which lag by two years, are projected to be $25 million less for the city than received in 2010, reflecting income generated during the recessionary years of 2009 and 2010. This affect is occurring statewide. The city expects marginal improvement in distributions for fiscal 2012. To help offset this weakness, $20 million was appropriated from the county rainy day fund in 2011 and the city has continued to impose expense reduction efforts this fiscal year. Management has indicated property tax revenues have been slightly better than forecasted and with expenditure reductions fiscal 2011 year-end results may outperform budgeted projections.
The city's preliminary plan for 2012 to offset income tax declines may include the use of general fund reserves with a plan to replace any use of reserves in the future when revenues increase. Additionally, the city may rely on reimbursements from tax increment districts for capital expenditures paid for by the city. This represents a practice not typically carried out by the city but available to it. Fitch believes this financial flexibility combined with strong reserve levels will enable the city to withstand these challenges over the next two years.
The city is selling its water utility and wastewater and treatment facilities (the systems) to Citizens Energy Group (CEG) effective later this month. The agreements with CEG include an assumption/funding of all outstanding debt related to revenue bonds for the sanitary district and waterworks, an additional PILOT payment from the wastewater system on an ongoing basis, and a $262 million cash payment at closing. Management has indicated that the proceeds will be deposited in its capital projects fund to support future capital projects freeing up general funds used in prior years fur such purposes.
The city has made a number of capital borrowings to support infrastructure improvements and does not foresee any new debt in the next few years especially with the infusion of proceeds from the sale of the utility systems. Debt ratios are moderate on an overall basis with the inclusion of tax increment debt, non-property tax revenue debt and overlapping debt from municipal and school corporations.
The city participates in the State's Public Employees' Retirement Fund (PERF) for its police and fire fighters hired after April 1977 and in another plan administered by PERF for all other city employees. Contributions made in 2010 totaled $31.9 million or a moderate 4.5% of fiscal 2010 general fund spending. The state's reimbursement of the city's annual pension contributions for its pre-1977 plan, commencing in 2009, helped offset this growing fixed cost and future liability. The city is making pay-go payments on its other post-employment benefit (OPEB) obligation and paid a manageable $1.6 million in fiscal 2010. The unfunded liability is $140 million as of Dec. 31, 2009 assuming a 4% discount rate.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 08, 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria