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HomeMy WebLinkAboutS&P RATING REPORT 062617 S&P Global Ratings RatingsDirect') Summary: Carmel Local Public Improvement Bond Bank, Indiana Carmel; 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.com Table Of Contents Rationale Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 26,2017 1 1874400 1 32542918 Summary: Carmel Local Public Improvement Bond Bank, Indiana Carmel; General Obligation; General Obligation Equivalent Security; Moral Obligation Credit Profile US$7.22 mil Taxable Special Prog Bnds(Carmel)(Midtown South Proj)ser 2017A dtd 07/18/2017 due 01/15/2042 Long Term Rating AA+/Stable New Carmel 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 Affirmed Carmel Redev Auth,Indiana Carmel,Indiana Carmel Redev Auth(Carmel)GO Long Term Rating AA+/Stable Affirmed Rationale S&P Global Ratings assigned its'AA+'long-term rating and stable outlook to Carmel Local Public Improvement Bond Bank,Ind.'s series 2017A special program bonds,issued for the city of Carmel.At the same time,we affirmed the'AA+' rating on the city's general obligation(GO)and ad valorem property tax-backed debt.Moreover,we affirmed our'A+' long-term rating and stable outlook on the city's series 2016 local public improvement bond bank special program bonds. The 2017A bonds 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 an ad valorem property tax 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.This risk is mitigated by a requirement to maintain two-year business interruption insurance and 100%replacement cost insurance language.The lessor is responsible for maintaining the insurance.The issuer is also planning to use the bond proceeds to capitalize the interest payments.The city will also purchase a surety policy which will serve as a debt service fund for the proposed obligations.We believe the construction and abatement risks are properly mitigated.Officials will use bond proceeds to finance Midtown project infrastructure and improvements. 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 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 26,2017 2 18714)O 3035.3918 Summary: Carmel Local Public Improvement Bond Bank, Indiana Carmel; General Obligation; General Obligation Equivalent Security;Moral Obligation 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. 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 secured and payable out of net revenues of the waterworks.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 pledge as a stronger pledge. 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. The'AA+'long-term 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 results that could improve in the near term relative to fiscal 2016, which closed with an operating deficit in the general fund and a slight operating deficit at the total governmental fund level in fiscal 2016; • Very strong budgetary flexibility,with an available fund balance in fiscal 2016 of 22%of operating expenditures; • Very strong liquidity,with total government available cash at 56.7%of total governmental fund expenditures and 2.5x governmental debt service,and access to external liquidity we consider exceptional; • Very weak debt and contingent liability position,with debt service carrying charges at 23.1%of expenditures and net direct debt that is 453.1%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 MSA,which we consider to be broad and diverse.Carmel is a wealthy, growing community about 10 miles north of downtown Indianapolis.The city's population has increased by over 100% during the past decade. The city has a projected per capita effective buying income of 182%of the national level and per capita market value of$140,525,and a very deep,growing tax base of$12.4 billion. Residents have access to a diverse local employment base as well as a versatile employment base throughout the Indianapolis MSA.Over 100 companies have headquarters in the city,including CNO Financial Group Inc.,GEICO, Liberty Mutual Insurance,and Resort Condominium Intl(RCI).The county's unemployment rate,historically among the lowest in the state,averaged 3.2%in 2016. Hamilton county's income levels are among the highest in the state. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 26,2017 3 27149()) 302342918 Summary: Carmel Local Public Improvement Bond Bank, Indiana Carmel; General Obligation; General Obligation Equivalent Security;Moral Obligation Carmel was recognized by various prominent national media sources as one of the top places in the nation to live.The largely built-out city has a good mix of residential and commercial properties,with several large office complexes among the leading taxpayer. 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. Highlights 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 executive and the council,and could result in an additional appropriation being made by the council. 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 districts plans and needs are covered in a 10-year plan. Sources are broadly identified for all projects;however,uses are only detailed for budget plus two years.The broader,somewhat straight-lined eight-year capital improvement plan for the entire city is available for all major operating funds. • The city recently adopted investment and debt management policies. Investment holdings and earnings are reported to the council monthly. • It has a comprehensive formal reserve policy of 15%of operating expenditures for the general fund and the rainy-day fund. Adequate budgetary performance Starting with the 2015 fiscal year,the city converted its reporting to GAAP based from cash-based statements.The city's 2015 and 2016 accrual statements are currently being audited by the Indiana State Board of Accounts.The city's finance officials expect the final audits to be identical to the current unaudited versions that we received.We believe that GAAP reporting is substantially more transparent compared to cash basis audits and financial reports,and hence we used the GAAP 2015 and 2016 numbers as a basis for our analysis. Carmel's budgetary performance continues to be adequate in our opinion.The city had deficit operating results in the general fund of negative 1.8%of expenditures,and slight deficit results across all governmental funds of negative 1%in fiscal 2016.Our assessment accounts for our expectation that budgetary results could improve from 2016 results in the near term. We have added transfers out from the general fund as general fund expenditures because transfers out from the general fund for debt service,health insurance,and arts grants are recurring according to management.Transfer out to health insurance was considerably high in 2016.The health insurance fund was treated as an internal service fund in 2015. It was reclassified as a nonmajor special revenue fund in 2016.As a consequence,health insurance premiums WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 26,2017 4 Summary: Carmel Local Public Improvement Bond Bank, Indiana Carmel; General Obligation; General Obligation Equivalent Security;Moral Obligation paid from the general fund were classified as premiums(expenditures)in 2015,but as inter-fund transfers in 2016. Additionally,we adjusted the 2016 results for$15.4 million one-time income tax distribution,$3.8 million of which went into the general fund and for nearly$37.2 million spending of bond proceeds. Finally,the city made a successful, non-recurring appeal to state taxing authorities to allow a one-time increase of$4.5 million in its 2016 property tax levy,most of which was allocated to the general fund.We have treated that revenue line as a one-time increase as well. The city's generally fund revenue profile is fairly diverse.Nearly 42%of revenue is derived from local property tax base and essentially the same amount or another 42%is derived from income tax.Both revenue categories performed really well over the past several years.Carmel expects property tax and income tax revenues to continue to increase as a result of tax-base expansion.The city's share of countywide income tax revenue is based on its property tax as a percent of the total county tax.As property tax revenue increases,so will income tax revenue. The city is projecting a general fund deficit of 0.1%in 2017 and a surplus of 4.8%in 2018.We expect the total governmental fund results to remain generally positive. Hence we expect the budgetary performance to remain adequate in the foreseeable future. Very strong budgetary flexibility Carmel's budgetary flexibility is very strong,in our view,with an available fund balance in fiscal 2016 of 22%of operating expenditures,or$17 million. Following the transition to GAAP reporting,the city's general fund and rainy-day fund are now reported as one fund. We expect the city's reserves to decline modestly in 2017 from 2016,but improve slightly in 2018;as such,we don't expect the budgetary flexibility to weaken in the future. Very strong liquidity In our opinion,Carmel's liquidity is very strong,with total government available cash at 56.7%of total governmental fund expenditures and 2.5x governmental debt service in 2016. In our view,the city has exceptional access to external liquidity if necessary. The majority of the city's investments are in fixed-income securities,so we don't view its investments as aggressive.In addition,management has confirmed that the city has no contingent liquidity risks from financial instruments with payment provisions that change upon certain events.We expect the city's liquidity position to remain very strong.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. Very weak debt and contingent liability profile In our view,Carmel's debt and contingent liability profile is very weak.Total governmental fund debt service is 23.1% of total governmental fund expenditures,and net direct debt is 453.1%of total governmental fund revenue. The city's debt burden is very high,which we view as a major credit weakness.The city plans to issue slightly over $110 million in debt,ultimately backed by the special benefits tax,income tax pledge,and tax increment revenues.The debt burden could exceed 550%after the new debt is issued. However,a significant portion of the city's direct debt WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 26,2017 5 187.49;1 3025.2918 Summary: Carmel Local Public Improvement Bond Bank, Indiana Carmel; General Obligation; General Obligation Equivalent Security;Moral Obligation burden is paid through tax increment and county option income tax revenues,limiting the property tax burden on residential homeowners. Some of the city's obligations were privately placed.We have obtained the documents and determined that they do not contain any unusual covenants,acceleration provisions,or mandatory tender days that could negatively affect liquidity. The city makes annual contributions to the Indiana Public Employee Retirement Fund(PERF)and 1977 police officers' and firefighters'pension and disability funds,both cost-sharing multiple-employer,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.We believe the current rate of return assumptions built into the valuations is reasonable at 6.75%. The city offers other post-employment benefits(OPEB)in the form of health insurance.The OPEB is authorized by the common council and is subject to appropriation.The city finances retiree health care benefits on a pay-as-you-go basis.As of Dec.31,2015,the unfunded liability equaled$36 million. Carmel's combined required pension and actual other postemployment benefits(OPEB)contributions totaled 4%of total governmental fund expenditures in 2016.The city made its full annual required pension contribution in 2016. Strong institutional framework The institutional framework score for Indiana municipalities is strong. Outlook The stable outlook is based on the outlook on our long-term rating on the city's debt.Specifically,it reflects our expectation that Carmel will maintain at least very strong budgetary flexibility and very strong liquidity.We expect the city's budgetary flexibility to remain at least adequate.We believe the rating is constrained by the city's very weak debt burden. 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 If the city experiences mounting debt pressures or cash reserves fall below expectations due to a prolonged inability to bring the general fund budget closer to a balanced position,we could lower the rating.We could also lower the rating if budgetary flexibility and liquidity were to weaken. Upside scenario We could raise the rating if the city continues to strengthen its financial management policies to achieve a Financial Management Assessment score of"very strong"while maintaining very strong budgetary flexibility.An upgrade would also be contingent on a moderation of the city's debt burden. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 26,2017 6 874493 ;!'2342918 Summary: Carmel Local Public Improvement Bond Bank, Indiana Carmel; General Obligation; General Obligation Equivalent Security;Moral Obligation 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 Ratings Detail(As Of June 26, 2017) Cannel 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 Affirmed Carmel Local Pub Imp Bnd Bank(Carmel) Long Term Rating AA+/Stable Affirmed Carmel Redev Auth,Indiana Carmel,Indiana Carmel Redev Auth(Carmel)(Illinois Street Proj)GO Long Term Rating AA+/Stable Affirmed 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.globalcreditportal.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 JUNE 26,2017 7 ] 7 49(1 3C,2:)42918 Copyright©2017 by Standard&Poor's Financial Services LLC.All rights reserved. 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