Fitch Affirms Indianapolis-Marion County Public Library, IN at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA+' Issuer Default Rating (IDR) of the Indianapolis-Marion County Public Library, IN and affirmed the 'AA+' ratings on the following series of general obligation (GO) bonds:

--$7.7 million go refunding bonds, series 2011;

--$1.1 million go refunding bonds, series 2012;

--$22.4 million go refunding bonds, series 2013.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the library, payable from a limited ad valorem tax levied on all taxable property within the library system's boundaries.

KEY RATING DRIVERS

Affirmation of the 'AA+' IDR and rating for the Indianapolis-Marion County Public Library's GO bonds reflects the library system's history of solid operating performance and its significant financial flexibility. Fitch believes the latter will enable the system to ride out future periods of revenue stress with a moderate impact on service levels and fund balances. The rating also reflects the system's low long-term liability burden compared to its economic resource base as well as its solid expenditure flexibility and healthy revenue growth prospects despite limited independent legal ability to raise revenues.

Economic Resource Base

The public library system serves residents of both Marion County and the city of Indianapolis. Marion County is the largest Indiana county by population with 939,000 residents estimated as of 2015. Indianapolis (Fitch GO rating of 'AAA') is the county seat, as well as the state capital and Indiana's largest city. The local economy is well-diversified. Pharmaceutical production, health services, manufacturing, and professional and business services are the leading sectors both in terms of employment and industrial output. Population growth has been strong since 2000.

Revenue Framework: 'a' factor assessment

Revenue growth has slightly lagged the level of inflation since 2004 but is projected to accelerate in the near term to levels above the U.S. consumer price index (CPI). The library system has virtually no independent legal ability to raise revenues, as its annual property tax levy must be approved by the Indianapolis city council. The levy is also limited by Indiana's 'circuit breaker' legislation.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth has generally been in line with, to marginally above, the system's revenue growth rate. Fitch expects this pattern to persist. Fitch believes the flexibility of the library's main expenditure items is solid, as the library board has sole authority to determine the size of the work force, library hours and number of library branches.

Long-Term Liability Burden: 'aaa' factor assessment

The system's combined long-term liability burden of debt and unfunded pension liabilities is low in relation to the economic resource base.

Operating Performance: 'aaa' factor assessment

Management has made consistent efforts to support financial resilience with limited to no material deferral of required spending, and has a solid track record of growing the reserve cushion through recurring operating surpluses. Fitch regards the library system's gap-closing capacity as very strong.

RATING SENSITIVITIES

PACE OF FUTURE REVENUE GROWTH: Fitch expects revenues to expand at roughly the rate of inflation, and below the rate of U.S. GDP. If revenues expand at a pace below U.S. CPI, then this could put negative pressure on the rating.

BUDGETARY CONSERVATISM: Evidence that the library has departed from its historic practices of fiscal and budgetary conservatism could place negative pressure on the rating.

CREDIT PROFILE

The library is an independent municipal corporation governed by an appointed seven person board whose members serve staggered terms of four years each. The library system consists of a Central Library, 23 branches and three mobile units. The system's service area includes all areas of Marion County with the exception of the Town of Speedway, which maintains its own library system. The City of Beech Grove's library system board voted to consolidate with the county system in early 2016. The merger of the two systems went into effect as of June 1, 2016.

The public library system benefits from being based in a broad service area with a diverse and vibrant local economy centered on the city of Indianapolis. Major employers include St. Vincent's Hospital and Health Care Centers (17,400 employees), Indiana University Health (11,800), Eli Lilly and Company (10,600), Wal-Mart (8,800) and Federal Express (6,600). Economic diversity is high and growth in residents has been steady, with the county population rising by 5% between 2000 and 2010; recent estimates suggest the population rose by another 3.9% between 2010 and 2015.

The unemployment rate for both the city and the county was 4.3% in July 2016, which was roughly even with Indiana's but below that of the U.S. The county's unemployment rate is commonly below that of the U.S. After declining by a cumulative 24% between 2007 and 2012 due to the combined impact of the property market downturn and a wholesale overhauling of the state's property assessment system, taxable assessed values (AV) rebounded by 5.7% in 2014 and rose by another 1% in 2015. Estimates for 2016 are for a 3% to 4% increase in AV.

Revenue Framework

The majority (76%) of the library system's revenues are derived from property taxes levied by the consolidated city-county government of Indianapolis and Marion County, commonly referred to as Unigov, on behalf of the library system. Another 18% of revenues are derived from intergovernmental transfers originating from the state of Indiana. These revenues consist primarily of local option income taxes first levied in 2008 to offset a modest decline in property tax receipts that resulted from the 'circuit breaker' legislation adopted by the state in that year.

Management expects property tax revenue growth to accelerate in the near term to levels above the rate of inflation based on the county's improving AV, which will raise the library's maximum annual levy. Indiana state law limits the property tax levy to a fixed percentage of AV based on the number and type of properties included within a taxing jurisdiction. Growth in the levy is linked to annual growth in assessed values, minus exceptions allowed for specific property types under Indiana's 2008 'circuit breaker' legislation. Management reports that the system's maximum annual levy growth has averaged 2.6% since 2011. The library utilizes projections prepared by an independent consultant that estimates maximum levy growth of at least 3.8% per annum through 2019. With property owner exceptions caused by the circuit breaker, Fitch believes the pace of levy growth will be slightly less rapid.

The public library board's independent legal ability to raise revenues is highly restricted. First, ultimate authority to set the library system's annual levy is in the hands of the Unigov's city-county council, which votes to approve the tax levy annually. The sole revenue-raising area in which the library board has discretion is the levying of fees, fines and service charges on library patrons. The aforementioned revenues accounted for a low 4% of total revenues in fiscal 2015.

The library's ability to raise revenue is further limited by Indiana's 2008 'circuit breaker' legislation, which places an annual limit on property tax levy growth based on percentage growth in gross AV as calculated vis-a-vis the number and type of properties within a taxing jurisdiction. For homeowner-occupied properties, the annual circuit breaker cap is 1% of gross AV, for other residential properties, farmland and long-term care facilities the cap is 2% of gross AV, and for non-residential properties and personal property the cap is 3% of gross AV. The maximum levy cap for a municipality is derived from a blend of all classes of properties and the annual pace of AV growth. Indiana's circuit breaker legislation thus places tight limits on the public library system's ability to raise its property tax levy.

Library management reports that the city-county council has always approved the library board's requests for setting its property tax levy. The library board requests setting the levy at the maximum levy rate annually.

Expenditure Framework

The library is a single-purpose entity with limited operating risk. The largest expenditure item (71%) consists of providing library services to patrons (i.e. maintaining the branches, paying salaries and benefits, and purchasing and replacing books and periodicals). Debt service consumes another 22% of spending, which is high but not unusual for a single-purpose entity.

Fitch expects the natural pace of spending growth will remain in line with, to marginally above, the pace of revenue growth in the absence of policy action by management.

The library system maintains a high degree of control over its expenditures, which consist mainly of maintaining library buildings and catalogues and keeping sufficient staff to support the system's hours of operation. Because the library board has complete control over the number of branches and operating hours it has broad leeway to expand or reduce hours, as needed, to control spending. During the period from 2010 through 2011, the system was able to successfully adapt to the delayed receipt of a portion of its tax levy by curtailing library hours by 26% across all branches, reducing staff, and delaying purchases to reduce spending. These actions resulted in an 11% drop in expenditures between fiscals 2009 and 2010, allowing the system to maintain essential services and conserve fund balances. The library board could repeat all of these actions, if needed, to balance its budget. In addition, the board can reduce the number of branches if it deems such measures necessary to reduce costs.

Management's control over headcount is likewise broad and at the sole discretion of the board. The library system employed approximately 610 persons in 2015, only 363 of which were full-time. Of the library's full-time employees, roughly 75% belong to the system's sole bargaining unit, the American Federation of State, County and Municipal Employees (AFSME). Contracts typically contain periodic annual re-openers, and salary increases have been in line with the pace of inflation. Management believes the contract terms provide considerable flexibility with regard to salary and benefit costs. In Fitch's opinion, Indiana's public sector labor law gives local governments a high level of control over headcount, workplace rules and conditions, salaries and employee benefits.

The library system's fixed carrying costs for debt, pensions and other post-employment benefits (OPEB) are moderately elevated at 25% of government spending in fiscal 2015. Debt service accounted for the lion's share of carrying costs at just below 22%, while pensions made up 3% and OPEB contributions less than one-half of one percent to fixed costs. The system's somewhat elevated debt service costs are partially due to rapid principal amortization, with 100% of debt maturing over the next 10 years.

Long-Term Liability Burden

The library system's long-term liability burden is low compared to the size of its underlying economic resource base. As of 2015 the system's net overall debt and pension liabilities equaled 4.5% of personal income. Overlapping debts of the city, county and other taxing jurisdictions comprises 95% of the system's total long-term liabilities, however. The library had $65 million of direct debt outstanding as of Dec. 31, 2015. The board plans to issue approximately $50 million of new-money bonds over the next several years to reconfigure several buildings and to build a single new facility. Debt ratios are not expected to change materially as the majority of the planned new debt will be layered into the system's existing maturity profile to replace old debt as it retires.

Library employees participate in the Indiana Public Employees' Retirement Fund (PERF), a state-run, multi-employer defined benefit pension plan. As of June 30, 2015, the PERF's assets-to-liabilities ratio was 77% using the fund's own relatively conservative 6.75% rate of return assumption. The library system is required to contribute at an actuarially determined rate, which was 11.1% of annual covered payroll in 2015.

Operating Performance

Fitch believes the library system is well positioned to withstand the stresses associated with a moderate economic U.S. economic downturn while maintaining a high degree of fundamental financial flexibility. Fitch believes that the library would respond to the revenue declines caused by a mild recession with a series of spending adjustments that would, in all likelihood, sufficiently address any budget gaps that opened as a result of the revenue declines associated with a mild recession. While it is possible that the system could draw on its fund balances to cover a portion of the revenue shortfall caused by a recession, Fitch expects such draws would be both short-lived and modest in nature. General fund reserves would most likely remain above Fitch's 'aaa' assessment level.

Following a $1.5 million operating surplus after transfers in fiscal 2015 the general fund's available fund balance rose to $16.7 million, equal to 46% of spending. The library prudently maintains an additional rainy day fund balance outside of the general fund that can act as an extra shock-absorber during periods of financial strain. The rainy day fund totaled $4.1 million in fiscal 2015 equal to an additional 11.2% of general fund spending.

Fitch regards the library's financial operations as conservatively managed, with a high level of attention to cost management since Indiana's circuit breaker legislation was adopted in 2008. The library has achieved operating surpluses in five of the past seven fiscal years. The two operating deficits, in fiscals 2011 and 2013, were caused by planned drawdowns of fund balance to pay for capital projects. To offset its relative inability to legally raise new revenues independently, and to avoid the need for tax anticipation warrants during the budget year to bridge delays between the mailing and the receipt of taxes, the library maintains elevated fund balance levels and has a policy in place requiring the maintenance of unrestricted reserves in an amount equal to the property tax timing mismatch, presently $5 million (or, roughly 14% of fiscal 2015 general fund spending). The system has consistently exceeded this target since fiscal 2010. Fitch expects reserves will continue to be maintained at, or near, current levels given management's proven success at controlling expenses.

The library system's ostensible revenue volatility over the 10-year calculation period from 2004 through 2014 is almost entirely attributable to delays in the distribution of the full property tax levy in 2007 and 2008 as a result of Indiana's reform of its property assessment system and the simultaneous adoption of statewide 'circuit breaker' legislation. In reality, the tax levy expanded slowly over this period and would not have been particularly volatile absent the multiple overhauls enacted by the state. Revenue fluctuations since 2011 have been caused mainly by shifts in local earned income taxes.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012127

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012127

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Michael D'Arcy
Director
+1-212-908-0662
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shannon McCue
Director
+1-212-908-0593
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael D'Arcy
Director
+1-212-908-0662
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shannon McCue
Director
+1-212-908-0593
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com