Fitch Affirms Hendricks County, IN's GO Bonds at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Hendricks County, IN (the county) bonds at 'AA+':

--$4.7 million general obligation (GO) bonds, series 2007;

--Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

GO bonds are payable from ad valorem taxes levies on all taxable property within the county.

KEY RATING DRIVERS

The county's 'AA+' rating reflects the county's solid economic base, substantial revenue control and expenditure flexibility, strong financial management and reserve balances that are more than sufficient to offset a recessionary revenue decline.

Economic Resource Base

Hendricks County (population 158,192) is located immediately west of Indianapolis, and is well situated along major interstates, just outside of the I-465 loop that surrounds Indianapolis. Indianapolis airport is partially in the county, serving as a transportation hub for nearby warehouses. Danville is the county seat. The local economy is highly diverse and includes significant manufacturing, healthcare, logistics and retail components. Population growth since 1990 has been robust and extremely rapid, as county population grew by 38% between 1990 and 2000, and by 40% between 2000 and 2010.

Revenue Framework: 'aaa' factor assessment

Hendricks County enjoys significant revenue raising flexibility as well as solid revenue growth prospects. Revenue flexibility is based on elected leaders' independent control over the income tax rate, which remains well below the statutory cap.

Expenditure Framework: 'aa' factor assessment

The county maintains solid expenditure flexibility with moderate fixed charge carrying costs. Personnel cost increases are reasonable with affordable salary raises expected. County employees are not presently unionized.

Long-Term Liability Burden: 'aa' factor assessment

The county's long-term liability burden is moderately low, with limited direct debt and unfunded pension liabilities. Taken together with debts issued by overlapping entities, these liabilities equal roughly 10% of resident personal income. Overlapping debt could rise as demand for services such as new schools keeps pace with a rising population.

Operating Performance: 'aaa' factor assessment

Fitch regards the county's financial resilience as strong, as general fund reserves are supplemented by rainy day and income tax fund balances, which taken together would be more than sufficient to weather a mild downturn. Fitch views the county's gap-closing capacity as superior.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's strong operating performance. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The local economy benefits from its proximity to Indianapolis, with population and employment growth outpacing the MSA and the state. The county is also home to a large commercial base separate from Indianapolis and includes major employers in diverse sectors such as auto parts manufacture, healthcare, consumer products, distribution and energy. Income levels are above state and MSA levels. Main industries include distribution, healthcare, utilities, manufacturing and retail. Property assessed values were flat between 2010 and 2013, but have since grown at an accelerated pace. County officials project future assessed value (AV) growth to be around 4% annually. Population continues to grow rapidly; the American Community Survey estimates 9% growth between 2010 and 2015.

Revenue Framework

The county's revenues mainly come from property and income taxes. The general fund is funded almost entirely with property taxes. Property taxes account for roughly 35% of major governmental fund revenues. Income taxes account for approximately 63% of major governmental fund revenues.

Average historical general fund revenue growth from 2004 through 2014 was on par with the rate of U.S. GDP growth over the same period. Fitch expects the county's natural rate of revenue growth to be in line with or above U.S. GDP, as evidenced by steady assessed value expansion, solid building permit applications, and above-GDP income tax growth.

The county has excellent revenue raising ability, despite the limitations resulting from state legislation imposing a circuit breaker on property tax revenue growth. The county enacted a local income option tax for public safety effective 2016, increasing the total income tax rate to 1.5% from 1.4%. County elected leaders can further increase the income tax rate independently to a total of 3.75%, providing significant revenue-raising flexibility.

Expenditure Framework

The county provides a variety of public services, including public safety through the sheriff's department, as well as courts, the county jail, and the maintenance of public highways.

Total expenditures are expected to grow roughly in line with revenues. The sheriff's department is the largest expenditure item, and staffing levels are expected to increase slightly. Management projects total annual payroll increases to be around 3% based on expected salary and benefit rates.

The county has a reasonable amount of expenditure flexibility, with moderate fixed charge carrying costs accounting for 14% of total government spending in fiscal 2015. Fixed costs have moderated in recent years as debt has matured. Annual pension contributions have consumed between 3.5% and 4.5% of expenditures, which is modest. The county has no labor union contracts as all employees are non-union. During the most recent recession when faced with revenue declines, the county did not need to cut back expenditures or institute hiring freezes.

Long-Term Liability Burden

The county's overall long-term debt and pension burden is low at approximately 10% of aggregate personal income. The bulk of the county's long-term liabilities result from debt issued by overlapping entities such as school districts, cities and towns. The county does not expect to issue significant additional debt, but it is possible that overlapping entities' debt burdens could rise, as demand for services from a growing population prompts local governments to bond for new infrastructure.

The county contributes to the Indiana Public Employees Retirement Fund (PERF), the County Police Retirement, and the County Police Benefit plan to fund employee pensions. PERF is an agent multiple-employer plan, while the two other plans are single-employer defined benefits programs. The combined asset-to-liabilities ratio for all three plans was 78% as of Jan. 1, 2015, although increased PERF contribution rates are expected. Pension and pay-go other post-employment benefit (OPEB) contributions are currently moderate.

Operating Performance

The county has consistently deposited excess revenues into a rainy day fund, and is committed to maintaining a cash balance of at least $10 million (around half of 2015 general fund spending) in this fund. This has been the case since 2010. The county also targets a minimum of a $5 million cash balance in its Economic Development Income Tax (EDIT) fund. Together with the general fund cash balance, these represent sizeable reserves available for operations. Although the use of cash-basis accounting overstates the level of available reserves when compared to the more common GAAP-basis reports that Fitch reviews in rating local governments, Fitch believes that the reported level of balance is large enough to provide assurance that the county has a very high level of gap-closing capacity.

The county proactively and prudently manages its finances, as evidenced by the above reserve policies as well as measures such as long-term financial planning, conservative budgeting, raising local income taxes to offset property tax losses, and limiting new debt issuance. Management was able to achieve operating surpluses across its major governmental funds (i.e. general, CAGIT, CEDIT-County, CEDIT-Homestead) in five of the past seven years, and was thereby able to add significantly to fiscal reserves. General fund and income tax fund balances grew to a combined $32 million, equal to 74% of expenditures, in fiscal 2014 and remained just below $30 million (61% of expenditures) in 2015. The county has continued to fund statutorily required payments and infrastructure improvements during the present expansion.

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

In addition to the sources of information identified in the 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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014827

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Michael D'Arcy, +1-212-908-0662
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael D'Arcy, +1-212-908-0662
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com