Fitch Affirms Tippecanoe County, IN's First Mortgage Bonds at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the rating on Tippecanoe County Governmental Building Corporation, Indiana's (the county) first mortgage bonds as follows:

--$6.7 million first mortgage refunding bonds, series 2011, at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are backed by lease payments payable from a dedicated ad valorem tax levied by Tippecanoe County. However, if the leased property is damaged or destroyed, the county shall abate the lease payments for the period of time the leased property is unfit for use or occupancy. To mitigate the abatement risk, the county is required to carry physical loss insurance equal to 100% of the replacement cost of the property, and rental interruption insurance equal to two years. The leased premises consist of a jail facility.

KEY RATING DRIVERS

AMPLE FINANCIAL CUSHION: The county has significant financial resources and flexibility and is well-positioned to manage the comprehensive statewide limit on property taxes.

SOLID REGIONAL ECONOMY: The regional economy is anchored by higher education (most notably, Purdue University) and manufacturing and proximity to Indianapolis.

STABILIZING TAX BASE: Several years of valuation declines have reversed, and Fitch expects the tax base to remain stable. A moderate level of taxpayer concentration is evident. Household incomes are below average and poverty high, which may reflect the large student-aged population.

MODERATE DEBT PROFILE: The direct debt burden on the budget is low, fully amortized in 10 years and no additional debt is currently contemplated. Overall debt is generally moderate.

SOUND LEASE STRUCTURE: Lease payments are payable from an ad valorem property tax pledge but are subject to abatement. The abatement risk is mitigated by adequate insurance provisions. Indiana Code requires taxing units to fully fund payment for debt service or lease rental obligations regardless of any reduction in property tax collections due to the circuit breaker. In practice, the county has recently been funding about 45% of annual debt service requirements from available non-ad valorem revenues.

RATING SENSITIVITIES

STABLE CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the county's conservative budgeting and sound reserves. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

Tippecanoe County is located in west-central Indiana 60 miles northwest of Indianapolis. Over the past decade growth has been above state and national trends, increasing county population to 183,074 in 2014.

SOUND REGIONAL ECONOMY

The county benefits from its proximity to the greater Indianapolis employment region as well as a strong local base anchored in higher education and manufacturing. Purdue University, which enrolls roughly 39,000 students and employs over 15,000 staff, serves as a major economic engine for the county. The manufacturing sector, and in particular durable goods production, is also a significant economic driver. The local economy stands to benefit from the recent construction of a new General Electric jet engine facility, expected to add 200 well-paying jobs to the county employment base, and a planned Subaru facility expansion, which is projected to add about 1,200 new jobs.

Wealth indicators are below average with median household income at 83% and 92% of national and state levels, respectively, and per capita personal income at about 75% and 87% of national and state levels. However, income levels are likely negatively skewed due to the large student population. As of August 2015, county unemployment (4.1%) was below comparable state (4.4%) and national (5.2%) levels.

STABILIZED TAX BASE

The introduction of the 35% statewide supplemental homestead deduction in 2009 reduced county taxable assessed values (TAV) by 13.9% in that year, with continued annual declines through 2012 resulting in a TAV decline of about 19% for the period. TAV returned to growth in 2013 (2.4%) with continued annual growth in subsequent years. The top 10 taxpayers are largely manufacturing oriented and account for about 14% of total assessed valuation.

AMPLE FINANCIAL RESERVES

Tippecanoe County's financial resources remain healthy. The county ended 2014 with a modest unaudited general fund operating surplus of about $73,000 and a sizable $9.6 million (29.1% of spending) unrestricted general fund balance, up from 28.4% in 2013. Starting in 2013, the county option income tax (COIT) was no longer distributed to the general fund, and these revenues ($8.7 million in 2014) were transferred to a newly created COIT fund, which is being used to fund public safety expenditures previously paid out of the general fund. On a combined basis, the funds' 2014 ending unrestricted balance was $11.9 million or about 29% of combined spending.

The county also maintains a separate rainy day fund that significantly bolsters its financial resources with an unaudited $8.1 million (24.7% of general fund expenditures) as of the end of 2014. The rainy day fund may be accessed with a simple majority vote of the county board. For 2015 the county anticipates using about $588,000 of reserves for infrastructure projects. The rainy day fund consists of general and economic development balances, with a targeted minimum balance of $7 million set for the general balance.

Budget projections for 2015 indicate a modest general fund deficit of about $68,000, which would maintain the ending balance at about 29% of spending. Budget projections conservatively assume 100% of expenditures being realized, as compared to reported historical actual performance at less than 95% of budgeted expenditures. As a result, management expects 2015 results to outperform budgeted expectations, yielding an end of year surplus estimated at over $1 million. Similarly, budget projections for 2016 indicate a deficit of $1.8 million, but because of the county's conservative budgeting, management expects actual performance to minimally yield break-even results.

PROPERTY TAX LIMITATION

Beginning with property taxes payable in 2010, property taxes are limited to 1% of assessed value of homestead property, 2% other residential property, and 3% all other. A political jurisdiction may not increase its property tax levy or borrow money to fund any revenue shortfall due to the application of the circuit breaker. However, Indiana Code requires taxing units to fully fund payment for debt service or lease rental obligations regardless of any reduction in property tax collections due to the circuit breaker. If property tax collections are insufficient, the taxing units must use non-property tax revenues or revenues from property tax levies for other funds, including for operations, to fully fund the debt service payment. In 2014 the county experienced a manageable (about $1 million or 3% of general fund expenditures) property tax loss due to the circuit breaker. The county has been able to offset the revenue reduction by managing expenditures, and also has the flexibility of substantial funds available to the general fund, if needed for budget balance. Property taxes made up over 60% of general fund revenues in 2014.

MODERATE DEBT

The direct debt burden is very low. Maximum annual debt service as a percentage of general fund, COIT fund, and debt service expenditures is manageable at about 5% despite the rapid amortization of debt entirely within 10 years. Overall debt, including overlapping municipalities, is moderate on a per capita basis (estimated at $2,066 for 2014) but higher as a percentage of market value (5.7%) No additional direct debt issuance is planned. Near-term capital needs will be pay-go funded, primarily from dedicated revenues outside of the general fund, including county economic development income taxes (CEDIT).

Long-term liabilities related to employee benefits appear manageable. Most employees are in a state-sponsored pension plan, and the county annually funds its full actuarial required contribution. The county also provides a single-employer defined benefit pension plan to its police. The police plan was 84% funded as of Jan. 1, 2014.

The county employs cash-basis financial reporting and since it does not comply with GAAP is not required to calculate other post-employment benefits. Fitch views this negatively as it is less transparent than GAAP. However, given the benefits structure whereby the county pays a portion of the retiree's healthcare premium, the long-term liability appears modest. Total carrying costs for debt service, pension and OPEB contributions equaled a modest 13% of general fund, COIT fund, and debt service expenditures.

Additional information is available on www.fitchratings.com

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings.

Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993207

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993207

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis
Analytic Consultant
+1-212-908-0514
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
+1-212-908-9181
Committee Chairperson
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis
Analytic Consultant
+1-212-908-0514
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
+1-212-908-9181
Committee Chairperson
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com