Fitch Confirms Indiana Finance Authority Lease Bonds, Series 2003C&D at 'AA'

2008-07-19 01:45:08 -

- Fitch Ratings has confirmed its underlying 'AA' rating to the Indiana Finance Authority's (authority) conversion of $71,250,000 facilities revenue refunding bonds, series 2003C and 2003D to term-rate period from auction-rate securities. The bonds are expected to be offered via negotiation on July 24. Fitch also affirms at 'AA' approximately $3 billion of Indiana's appropriation debt. The Rating Outlook is

Stable.

Originally issued by the Indiana State Office Building Commission, the series 2003C and 2003D bonds refunded certain maturities of the series 1995A bonds for the Wabash Valley Correctional Facility and certain maturities of 1995B bonds of the Rockville Correctional Facility, respectively. In 2005, all powers, duties, liabilities, property, and records were transferred to the authority, as the state acted to consolidate its issuers. The bonds issued for each correctional facility provided funds to construct and equip the facility. Separate use and occupancy agreements are in place between the authority and the state's department of administration to provide for the biennially renewal of rental payment.

With security derived from state appropriations, the 'AA' long-term rating reflects the state's lease/appropriation credit, the importance of the projects to the state, and the strength of the lease provisions. Indiana does not issue general obligation debt, rather meeting a bulk of its capital needs through debt issuance by the authority. Low debt is the state's principal credit strength and, since all debt is appropriation-backed, legislative approval is required for projects and financings, including annual appropriation of lease payments. The state's net tax-supported debt is just below $3 billion, which equates to a low 1.4% of estimated 2007 personal income. While the state's Public Employees' Retirement Fund remains nearly fully funded, the closed State Teachers' Retirement Fund, with an unfunded actuarial liability of $10.3 billion as of June 30, 2007, is only 45% funded. Although diversification has occurred, the state's economy remains considerably concentrated in manufacturing, exposing the state to economic downturns. Further, the state's improved financial position could be pressured ultimately by the assumption of local costs, particularly education, as part of the recently enacted property tax reform.

In recent years, solid revenue growth enabled the state to surpass conservative revenue estimates and build balances. Fiscal 2007 general and property tax relief fund revenues rose 4.7% over the prior year and the state ended the biennium with $881.5 million or nearly 7% of revenues in combined fund balances, including the rainy day reserve. Midway through the current biennium, state operating revenues rose 2.4% over fiscal 2007, just above estimate, on stronger than expected personal income tax performance. The sales tax grew 2.9%. Based on fiscal 2008 actuals, state revenues need to rise 1.8% in fiscal 2009 to meet budget. The state anticipates ending the biennium with combined balances of nearly $875 million, or approximately 6.5% of operating revenues, including a rainy day fund of $376 million.

The state recently enacted legislation toward bringing broad property tax reform to the state. Among a variety of changes under the legislation, the state assumes the remaining costs of primary and secondary education, in addition to other costs supported currently by local levies, funded by a 1% statewide sales tax increase, the retention and redirection of existing property tax relief funds, and wagering taxes from slot machines at horse racing facilities. The state estimates that new revenues will align closely with the assumed costs. Local property taxes are lowered, caps are placed on future increases, and an optional local income tax is permitted. If approved again by the legislature next year, the property tax caps will be considered as an amendment to the state constitution in November 2010.

Indiana's economy modestly grew out of the recessionary period early this decade, with some diversification, although a large manufacturing presence remains. Employment rose 0.5% in 2007, well under the nation's 1.1% rate, was on par with Indiana's performance over the last several years. More recently, employment declined 0.4% year-over-year in June 2008, fairing worse then the U.S. 0.1% rate of loss. Manufacturing earnings constituted 26% of Indiana's overall earnings in 2007, versus 12% nationwide, and just over 18% of employment as of June 2008. This sector is experiencing broad job losses, particularly in primary metals and transportation equipment, down 3.5% and 6.2%, respectively, in June 2008. State unemployment rate rose notably to 5.8% in June 2008, above the U.S. rate of 5.5%. The state's education and health sector rose rising 1.8% in June 2008 year-over-year. Total employment in the Indianapolis MSA, with its more diversified base, faired better than the state and U.S., growing 0.5% over the same period.

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