Fitch Affirms South Bend Redevelopment Auth, IN's Lease Revenue Bonds at 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA+' rating on the following South Bend Redevelopment Authority, Indiana's (the authority) bonds:

--$6.4 million taxable lease rental revenue refunding bonds, series 2011A (College Football Hall of Fame Project);

--$3.3 million lease rental revenue refunding bonds, series 2011B (Century Center Project);

--$2.9 million lease rental revenue refunding bonds, series 2009 (Morris Performing Arts Center).

In addition, Fitch affirms the 'AA+' rating on the city of South Bend's (the city) implied unlimited tax general obligation (ULTGO) bonds.

The Rating Outlook is Stable.

SECURITY

The lease revenue bonds are secured by semiannual lease payments payable to the trustee two days prior to debt service payment on the bonds.

The lease payments are payable from an ad valorem tax levied by the South Bend Redevelopment Commission (the Commission), unlimited as to rate or amount on all taxable property in the City of South Bend Redevelopment District, an area coterminous with the city. Lease payments are not subject to annual appropriation.

If the leased property is damaged or destroyed, the Commission will abate the lease payments for the period of time the leased property is unfit for use or occupancy. To mitigate the abatement risk, the Commission is required to carry physical loss insurance equal to the greater of 100% of the replacement cost of the property or the amount to redeem the outstanding bonds and rental interruption insurance equal to two years. Also to mitigate the abatement risk, the Commission is required to carry physical loss insurance equal to the greater of 100% of the replacement cost of the property or the amount to redeem the outstanding bonds and rental interruption insurance equal to two years. The company providing insurance must be rated at least 'B+' or better by A.M. Best Company (or comparable rating service if A.M. Best ceases to exist or rate insurance companies). The leased properties consist of the College Football Hall of Fame, the Morris Performing Arts Center, and the Century Center Complex.

KEY RATING DRIVERS

SOUND FINANCES: The city's sound financial position is characterized by strong reserve levels and proactive management that has successfully navigated the reduction in property taxes caused by state property tax reform. Expenditure cuts combined with the implementation of local income taxes have put operations on firmer ground.

ECONOMY BENEFITS FROM UNIVERSITY PRESENCE: As manufacturing has declined, the area has transitioned to a more service-based economy. The close proximity of the University of Notre Dame provides stability as the city continues to face ongoing economic challenges, including above-average unemployment and below-average income and wealth indicators.

MIXED DEBT PROFILE: Rapid amortization, moderate debt per capita, limited future debt plans, and adequate funding of the largest pension plan are offset by above-average debt to full value and lack of OPEB pre-funding.

LEASE AND ULTGO ON PAR: Fitch believes that insurance provisions sufficiently mitigate abatement risk to maintain the same rating on the lease revenue bonds and the implied ULTGO.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The city's continued high rating is contingent upon the maintenance of strong reserve levels. Fitch expects this trend to continue given management's history of prudent financial and budgeting practices.

CREDIT PROFILE

South Bend is the fourth largest city in Indiana, located in the north central part of the state, approximately five miles south of the Michigan border and 90 miles east of Chicago. The University of Notre Dame is adjacent to the city. City population totaled 101,168 in 2011, a decrease of 6% since 2000.

SOUND FINANCES DESPITE DECLINE IN PROPERTY TAX REVENUE

Since the implementation of the circuit breaker legislation in 2009, which limits property taxes to a percentage of gross assessed value, property tax revenues have declined by approximately 25%.

In anticipation of the decline in property tax revenues, city management was proactive in reducing expenditures and implementing new or increased local option income taxes which have partially offset the decline in property tax revenues. This increased reliance on economically sensitive income taxes subjects the city to additional revenue volatility. To help ameliorate the reduction in property taxes, the city has implemented measures to increase collection rates beyond the currently weak 93.4% including investigating eligibility of residents claiming homestead deductions.

For 2011 (year-end Dec. 31), the city recorded a small operating deficit after transfers of $806,000. Reserve levels remained high, with an unrestricted general fund balance equivalent to 35.9% of spending. When the $8.5 million in rainy day funds is added, reserves total 47.6% of spending, which Fitch views as very strong.

For 2012, on a cash basis, the city's preliminary estimates indicate a small general fund operating surplus and a small increase in fund balance. The 2013 budget calls for small increases (1%) in both general fund revenues and expenditures and stable reserve levels.

Positively, management has a cash reserve policy in place for certain funds to serve as fiscal protection against the risk of revenue shortfalls, emergencies, and unstable property tax collections. As of Dec. 31, 2012, the general fund cash reserve totaled 43% of expenditures compared to a policy of 25%. The rainy day fund was in compliance at 3% of prior year's total expenditures.

ECONOMY BOLSTERED BY UNIVERSITY PRESENCE

The city has successfully transitioned from manufacturing to a service-based economy with the University of Notre Dame, which is adjacent to the city, providing stability as the largest employer (approximately 4,700 employees). A university-led consortium of high-tech companies has invested in a nano-technology business incubator (Innovation Park at Notre Dame). Additionally, the university is involved in an off-campus development (Eddy Street Commons) featuring hotels, retail establishments, condominiums and townhouses. Both projects bode well for the area economy.

Other major employers include Memorial Health System (3,545), South Bend Community School Corporation (3,212), AM General Corporation (2,400) and St. Joseph Regional Medical Center (2,123). The major employers' workforces have been fairly stable though AM General, a manufacturer of military and special purpose vehicles, has had periodic furloughs with the rise and fall of federal government contracts.

NATIONAL FOOTBALL HALL OF FAME MOVES FROM SOUTH BEND

After 17 years in South Bend, the National Football Federation has moved the College Football Hall of Fame (the Hall) from South Bend to a new facility in Atlanta, GA to be opened in the fall of 2014. The Hall in South Bend closed in January 2013. The Hall was projected to attract 200,000 visitors when it moved from Ohio in 1995, but it only drew about 115,000 the first year and about 60,000 annually after that. Management is aggressively marketing the building for a replacement tenant and has received interest from several parties. Fitch believes there is minimal risk of lease payments not continuing as there is no appropriation risk. The last lease rental payment is Feb. 1, 2018.

WEAK SOCIOECONOMIC INDICATORS

Socioeconomic indicators remain weak with unemployment rates well above the state and national averages, despite contraction in the labor force. The city's unemployment rate was 10.8% as of December 2012, down from 11.1% a year prior, but still higher than state (8.5%) and national (7.6%) levels.

City income levels are below average, with per capita income 22% below the state and 31% below the national average. Poverty levels are almost double those of the state and nation. Low income levels are likely reflective, in part, of a large student population.

Taxable assessed valuation, about $2.4 billion in 2011, has shown a trend of annual declines from at least 2007 through 2011. In 2012, the trend reversed with a 0.7% increase recorded. The city is assuming no assessed value growth for budgeting purposes.

MANAGEABLE DEBT PROFILE

On a per capita basis, debt is moderate at $2,594, but debt to full value is 5.3%, which Fitch considers high. Positively, amortization is rapid with 70% of debt maturing in 10 years and future capital plans are manageable. The city's five-year (2013-2017) capital plan totals $204.9 million. The majority (61%) is for water and wastewater systems which will be funded by bonds paid from user rates. The remainder will be funded with cash (28%) and tax-supported capital leases (11%).

As is typical in Indiana, due to stringent restrictions on the issuance of general obligation debt, the city relies upon the use of lease rental revenue bonds. Lease rentals are payable from ad valorem taxes. The obligation to pay is not subject to appropriation, but is subject to abatement in case of damage or destruction of the leased premises. The requirement to maintain property and casualty insurance, along with rental interruption insurance sufficient to cover two years of abated rental payments, mitigates the abatement risk.

The majority of city employees participate in the Public Employees Retirement Fund (PERF), an agent multiple-employer defined benefit plan, administered by the state. The city continues to fund its statutory annual required contribution as mandated by the state. As of June 30, 2012, PERF was funded at a fairly strong 79% (based on a 7% rate of return).

In addition to PERF, the city has two single-employer defined benefit plans for police and firefighters hired prior to 1977. Indiana statute requires funding only the next year's budget expenditure; these plans have been funded on a pay-as-you-go-basis and therefore have a very low funding ratio of 3%. As a result of property tax reform, in 2009 the state assumed the funding of the plans. The combined UAAL for these plans is $164.8 million. Fitch does not expect the city to be responsible for this liability but recognizes as a risk the possibility that the state could change the law again. In that case, this sizable liability could revert to the city.

The city addresses its OPEB costs on a pay-as-you-go basis and has no plans to pre-fund the liability. Overall debt service, pension, and OPEB costs are manageable at 17% of total 2011 governmental fund expenditures.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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 and, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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