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HomeMy WebLinkAboutS&P RATING REPORT 111417 S&P Global Ratings RatingsDirect® Summary: Carmel, Indiana; General Obligation; General Obligation Equivalent Security; Moral Obligation Primary Credit Analyst: Anna Uboytseva,Chicago(1)312-233-7067;anna.uboytseva@spglobal.com Secondary Contact: Kathryn A Clayton,Chicago(1)312-233-7023;kathryn.clayton@spglobal.corn Table Of Contents Rationale Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 14,2017 1 ,949284 3018883'78 Summary: Carmel, Indiana; General Obligation; General Obligation Equivalent Security; Moral Obligation Credit Profile US$35.805 mil spl program bnds(Carmel)ser 2017B-1 due 07/15/2037 Long Term Rating AA/Stable New US$16.595 mil taxable spl program bnds(Carmel)ser 2017C-2 due 01/15/2035 Long Term Rating AA/Stable New US$0.855 mil taxable spl program bnds(Carmel)ser 2017-C1 due 07/15/2027 Long Term Rating AA/Stable New Carmel Local Public Improvement Bond Bank,Indiana Carmel,Indiana Carmel Local Public Improvement Bond Bank taxable spl prog bnds(Carmel)(City Center Ii&Midtown Phase la Proj) Long Term Rating AA/Stable Downgraded Rationale S&P Global Ratings lowered its long-term rating on Carmel,Ind.'s ad valorem property tax-supported debt one notch to'AA'from'AA+'.We also lowered our long-term rating on the city's series 2016 local public improvement bond bank special program bonds(moral obligation bonds)one notch to'A'from'A+'. Simultaneously,S&P Global Ratings assigned its'AA'long-term rating and stable outlook to Carmel Local Public Improvement Bond Bank's series 2017B-1 $35.8 special program bonds,series 2017C-1 $855,000 taxable special program bonds,and series 2017C-2$16.6 taxable special program bonds,all issued for the city of Carmel and secured by ad valorem property taxes.The outlook on all ratings is stable. The downgrade reflects our view of the city's rapidly increasing debt burden,with mounting leverage that can pressure flexibility and budgetary performance over time. Carmel's long-term debt grew,in real terms,by over$300 million in just three years.The annual debt costs are already high,and are estimated to grow 71%by 2022.The city is planning to layer in more tax-supported debt in the next two to three years.Thus far the city has been able to afford its debt,paying debt service mostly with tax increment revenues and local income taxes. In 2015,however,the general fund had to cover a portion of debt service as the city council did not approve a transfer in from the motor vehicle highway fund to cover it. In our view,this demonstrates the risk of high leverage and a heavy dependence on sometimes more-volatile tax increment revenues.We feel the city's crowded budget and high fixed costs leave it vulnerable to unanticipated economic or operating swings.In the future,if intended economically sensitive revenues do not perform well,it will be challenging for the city to divert that much operating revenue from the general fund for debt service. Furthermore,the city doesn't have a high reserve cushion,relative to the size of annual debt service,to carry it through extended stressful periods. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 14,2017 2 ,949281i ."7,0 t888078 Summary: Carmel, Indiana; General Obligation; General Obligation Equivalent Security;Moral Obligation Security on the 2017 B-1, C-1, and C-2 bonds These bond series are secured by debt service payments on the qualified obligations.The qualified obligations are payable from lease rental payments made by the Carmel Redevelopment Commission(on behalf of the city)to the Carmel Redevelopment Authority.The lease is secured by special benefit taxes(ad valorem property taxes)on all taxable property within the territorial limits of the commission,which is coterminous with the city.Lease payments are not subject to annual appropriation,though there is abatement risk.The lease agreement requires the authority and commission to add or remove property from the leased premises if the premises become unfit for use,so long as the value of the remaining property subject to the lease is sufficient to support lease rental payments in amounts sufficient to amortize any outstanding bonds secured by the lease agreement.The issuer is planning to use bond proceeds to capitalize the interest payment on the 2017B-1 bonds.The series 2017 B-1 and C-1 bonds are also secured by local income tax(LIT).We rate the bonds to the special benefits tax pledge,the stronger of the two,in our opinion. For more information on Carmel's LIT obligations,see the report published Oct.31, 2017. Series 2017C-2 is secured by special benefits taxes;however,the city expects the pay debt service with tax increment revenues.To alleviate the timing risk in the event the tax increment financing(TIF)revenues are less than anticipated,the city will use a portion of bond proceeds to purchase a Build America Mutual Corp. debt service reserve fund surety policy. Officials will use bond proceeds to refund taxable economic development revenue bonds 2013 Legacy Project(the bond didn't have the backing of special benefits tax in the past),acquire properties,and finance infrastructure improvements for various projects. Limited tax obligations and general creditworthiness The'AA'rating is based on ad valorem property tax pledges,subject to state circuit-breaker legislation.The levy of ad valorem taxes is subject to state circuit-breaker limitations,which place various caps on property tax levies based on a percent of real estate parcels'gross assessed value. Circuit-breaker legislation requires debt service to be fully funded regardless of any reduction in property taxes due to the application of the circuit breaker,and debt service payments are required to be made before tax levies are used for any other purposes. Factoring in these protections,as well as the city's financial stability and flexibility,we rate this limited-tax pledge at the same level as an unlimited-tax rating. Moral obligation bonds The'A'rating reflects Carmel's moral obligation pledge to replenish the debt service reserve fund(DSRF),if needed.As such,the moral obligation rating reflects the city's credit characteristics,rated'AA',and the risk of nonappropriation by the city-county council.The series 2016 bonds are also secured by and payable out of net revenues of the waterworks system.The obligation represents a first charge on the net revenues of the waterworks.Payment of principal and interest on the 2016 bonds is further secured by the DSRF funded by a reserve fund credit facility provided by Financial Security Assurance Inc.,now Assured Guaranty Municipal Corp.,and by another facility provided by Build America Mutual Corp.We rate the bonds based on the moral obligation pledge of the city rather than on the net revenues of the waterworks because we view the moral obligation pledge as a stronger pledge. Multiple revenue stream obligations Certain previously rated obligations are also formally secured by income tax revenues in addition to the ad valorem property tax.We view the ad valorem property tax pledge as a stronger pledge. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 14,2017 3 94926 30tgS6!Pr,+ Summary: Carmel, Indiana; General Obligation; General Obligation Equivalent Security;Moral Obligation The'AA'rating reflects the following credit characteristics: • Very strong economy,with access to a broad and diverse metropolitan statistical area(MSA); • Strong management,with"good"financial policies and practices under our Financial Management Assessment methodology; • Adequate budgetary performance,with operating deficits in the general fund and at the total governmental fund level in fiscal 2015; • Very strong budgetary flexibility,with an available fund balance that we expect will improve in the near term(due to one-time revenues)from its fiscal 2015 level of 12.7%of operating expenditures; • Very strong liquidity,with total government available cash at 42.2%of total governmental fund expenditures and 1.8x governmental debt service,and access to external liquidity we consider exceptional; • Very weak debt and contingent liability position(that is still growing),with debt service carrying charges at 23.7%of expenditures and net direct debt that is 454.9%of total governmental fund revenue;and • Strong institutional framework score. Very strong economy We consider Carmel's economy very strong.The city,with an estimated population of 88,366,is located in Hamilton County in the Indianapolis-Carmel-Anderson,which we consider to be broad and diverse.Carmel is a wealthy, growing community about 10 miles north of downtown Indianapolis. Hamilton County's income and wealth levels are among the highest in the state,and Carmel is currently one of the wealthiest cities in Indiana.The city has a projected per capita effective buying income of 186%of the national level and per capita market value of$140,525,and a very deep,growing tax base of$12.4 billion.The largely built-out city has a good mix of residential and commercial properties,with several large office complexes among the leading taxpayers. Carmel's residents have access to a versatile employment base throughout the Indianapolis MSA as well as a diverse local employment base. Over 100 companies have headquarters in the city,including CNO Financial Group Inc., GEICO,Liberty Mutual Insurance,and Resort Condominium International. Carmel has been recognized by various prominent national media sources as one of the top places in the nation to live and its population has increased by over 100%during the past decade. Strong management We view the city's management as strong,with"good"financial policies and practices under our Financial Management Assessment methodology,indicating financial practices exist in most areas,but that governance officials might not formalize or monitor all of them on a regular basis. Key practices include: • For budgeting purposes,the city reviews trends and consults with financial professionals as well as local businesses and government officials.The city uses a multiyear financial plan when developing its annual budget. • The finance committee meets monthly and reviews revenues and expenditures.Additionally,the common council is provided with monthly budget reports,and the council packets are posted on the city's website. Department heads are responsible for managing day-to-day operations and staying within their budgets.If something unexpected were to occur that would potentially require a budgetary change in due course,the change would be proposed to the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 14,2017 4 ;84,42u; 301808.78 Summary: Carmel, Indiana; General Obligation; General Obligation Equivalent Security;Moral Obligation council,and could result in an additional appropriation. However,the budget-to-actual reports are not examined during the monthly council meetings. • The city regularly updates its comprehensive long-term fiscal plan outlining financial forecasts and assumptions. The plan is prepared on a budgetary basis. • Detailed capital improvement redevelopment district plans and needs are covered in a 10-year plan.Sources are broadly identified for all projects;however,uses are only detailed for the current budget plus two years.The broader,somewhat straight-lined eight-year capital improvement plan for the entire city is updated for all major operating funds. • The city recently adopted investment and debt management policies. Investment holdings and earnings are reported to the council monthly. • The city has a comprehensive formal reserve policy of 15%of operating expenditures for the general fund and the rainy-day fund. While the city's FMA is"good",we note that there have been discrepancies between projected and actual results in recent years. Adequate budgetary performance Starting with the 2015 fiscal year,the city switched to reporting its results according to generally accepted accounting principles(GAAP)from cash-based statements.The city's 2015 and 2016 Comprehensive Annual Financial Reports (CAFR)were in the process of being reviewed by the State Board of Accounts(SBOA)at the time of our last review (June 2017).The SBOA made adjustments to the city's 2015 CAFR and subsequently released the final 2015 audit. Considering the materiality of the adjustments and the fact that the final 2016 SBOA audit has not been released yet, we made a decision to use the 2015 SBOA audit report as an initial measure of the city's budgetary performance because it is verifiable.We have also adjusted the financial data to better portray what we view as a more accurate depiction of the city's recurring activity:added recurring,below-the-line general fund transfers to the general fund expenditures(general fund transfers money into debt service,health insurance,and arts and grants funds on a recurring basis),adjusted out one-time nonrecurring revenues and spending of the bond proceeds. Carmel's budgetary performance is adequate in our opinion.The city had operating deficits of 5.7%of expenditures in the general fund and 7.9%across all governmental funds in fiscal 2015.In 2015,however,the general fund had to cover a portion of debt service as the city council didn't approve a transfer in from the motor vehicle highway fund to cover it. The city's ended 2016 with a general fund deficit of 1.3%(excluding one-time income and property tax distributions) according to the unaudited CAFR.The city is projecting a general fund deficit of 0.1%in 2017 and a surplus of 4.3%in 2018.The revenue forecast for 2018 includes$4 million to$6 million in annual supplemental income tax distribution from the state,which we understand is not guaranteed. If the city doesn't receive the supplemental revenue,the 2018 general fund results are projected to be essentially break-even. The city's key general fund revenue sources(property and income taxes)performed well over the past several years and will likely continue to grow if economic conditions remain favorable. However,if the revenue growth slows,the city could be forced to operate with minimal fiscal excess capacity because of its very high debt service requirements. Compared to 2016 actual debt service payment of approximately$33 million,the required annual debt service expense will be 40%higher in 2018 and 71%higher in 2022. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 14,2017 5 .9492'81 3e t£&3J 78 Summary: Carmel, Indiana; General Obligation; General Obligation Equivalent Security;Moral Obligation Thus far,the city has been able to afford this debt,paying debt service mostly with tax increment revenues.We think that 2015's financial performance demonstrates the risk of high leverage and heavy dependence on sometimes more volatile tax increment revenues.We feel the city's crowded budget and high fixed costs leave it vulnerable to unanticipated economic or operating swings. Very strong budgetary flexibility Carmel's budgetary flexibility is very strong,in our view,with an available fund balance that we expect could improve in the near term from its fiscal 2015 level of 12.7%of operating expenditures,or$10 million. Following the transition to GAAP reporting,the city's general fund and rainy-day fund are now reported as one fund. We expect reserves to improve to$17 million(22%of operating expenditures)in 2016 due mostly to$8.3 million in one-time income and property tax distribution.The general fund reserves in 2017 will remain essentially on par with 2016 reserves,but could improve slightly in 2018.Therefore,we don't expect budgetary flexibility to weaken in the future. While the reserves are very strong as a percentage of the budget,the city doesn't have a high reserve cushion,relative to the size of annual debt service,to carry it through extended stressful periods. Very strong liquidity In our opinion,Carmel's liquidity is very strong,with total government available cash at 42.2%of total governmental fund expenditures and 1.8x governmental debt service in 2015. The majority of the city's investments are in fixed-income securities,so we don't view its investment strategy as aggressive. In addition,management has confirmed that the city has no contingent liquidity risks.The city has issued a variety of debt obligations during the past 15 years,and demonstrated an exceptional access to the capital markets through different economic cycles.If debt pressures mount and the city is required to use cash to supplement underperforming tax increment revenues,future liquidity could be pressured. Very weak debt and contingent liability profile The debt and contingent liability profile is very weak,with debt service carrying charges at 23.7%of expenditures and net direct debt at 454.9%of total governmental fund revenue. The city's debt burden is very high and debt costs are rising,which we view as a major credit weakness. In addition to property and income tax-backed debt,the city has issued a number of developer TIF obligations and revenue bonds for its enterprise systems.The city's debt includes a fair amount of debt"issued for private purpose"to fund economic development efforts.Official plan to issue$60 million of bonds in the next two to three years to finance various infrastructure and public-private development projects,including construction of a hotel. A significant portion of the city's direct debt burden is paid through TIF and local income tax revenues, currently limiting the property tax burden on residential homeowners.Additionally,a number of outstanding obligations are secured by debt service reserve funds which will likely help mitigate the timing risk if TIF revenues are less than previously anticipated.TIF allocation areas will begin to expire in 2029,and the coverage on the debt service will not be sufficient in 2035 through 2037 based on current projections.The supplemental reserve fund at the redevelopment commission level will help support the debt service payments during that time,according to officials. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 14,2017 6 194,42b4 301886078 Summary: Carmel, Indiana; General Obligation; General Obligation Equivalent Security;Moral Obligation Pension obligations The city makes annual contributions equal to required contributions to the Indiana Public Employee Retirement Fund (PERF)and 1977 police officers'and firefighters'pension and disability funds,both cost-sharing multiemployer, defined-benefit pension plans administered by the state.As of Dec. 31, 2016,the city reported a liability of$16 million for its proportionate share of the PERF net pension liability.The net pension liabilities for 1977 police officers'and firefighters'pension and disability fund were moderate at$901,000 and$1.2 million,respectively.The PERF plan was 79%funded on the actuarial basis in 2016.The city's pension costs(4.1%of total budget)are manageable and are expected to remain so in the foreseeable future.The city finances retiree health care benefits on a pay-as-you-go basis, but this burden is minimal. Direct purchase obligations Some of the city's obligations were privately placed,including the series 2011 county option income tax revenue refunding bonds, 2004A tax increment revenue bonds,and a number of TIF-supported economic development bonds. We have determined that they do not contain any unusual covenants,acceleration provisions,or mandatory tender days that could negatively affect the city's liquidity.The series 2017B-2 special program bonds will also be privately placed.We will examine the documents after the transaction's closing. Strong institutional framework The institutional framework score for Indiana municipalities is strong. Outlook The stable outlook reflects our expectation that Carmel will maintain strong or better budgetary flexibility and liquidity. Precise forecasting is going to play a vital role,in our opinion,in ensuring the cash cushion remains adequate in light of rapidly growing debt costs. Given the city's detailed focus on long-term planning and our view of its healthy economy and very deep tax base,we do not expect the rating to change during the two-year outlook horizon. Downside scenario Should the increase in debt pressure budgetary flexibility,liquidity,and budgetary performance,resulting in weaker assessments,we could lower the rating. Upside scenario We believe the rating is constrained by the city's very weak debt profile.An upgrade would be contingent on a moderation of the debt burden,which we view as unlikely given Carmel's medium-term debt plans. Related Research • S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency,Sept. 12, 2013 • Incorporating GASB 67 And 68:Evaluating Pension/OPEB Obligations Under Standard&Poor's U.S.Local Government GO Criteria,Sept. 2, 2015 • Alternative Financing: Disclosure Is Critical To Credit Analysis In Public Finance,Feb. 18,2014 Ratings Detail (As Of November 14, 2017) WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 14,2017 7 19492e4 3018880;8 Summary: Carmel, Indiana; General Obligation; General Obligation Equivalent Security;Moral Obligation Ratings Detail (As Of November 14, 2017)(cont.) Cannel Local Public Improvement Bond Bank,Indiana Carmel,Indiana Carmel Local Public Improvement Bond Bank(Carmel)spl prog bnds(Carmel)ser 2016 due 06/01/2028 Long Term Rating A/Stable Downgraded Carmel Local Pub Imp Bnd Bank(Carmel) Long Term Rating AA/Stable Downgraded Carmel Redev Auth,Indiana Carmel,Indiana Carmel Redev Auth(Carmel)GO Long Term Rating AA/Stable Downgraded Carmel Redev Auth(Carmel)(Illinois Street Proj)GO Long Term Rating AA/Stable Downgraded Certain terms used in this report,particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria,and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com.All ratings affected by this rating action can be found on the S&P Global Ratings'public website at www.standardandpoors.com.Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 14,2017 8 1919281 301898378 Copyright©2017 by Standard&Poor's Financial Services LLC.All rights reserved. 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