NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to South Bend Redevelopment Authority, Indiana's (the authority) bonds:
--$8.2 million taxable lease rental revenue refunding bonds, series 2011A (College Football Hall of Fame Project), 'AA+';
--$3.3 million lease rental revenue refunding bonds, series 2011B (Century Center Project), 'AA+'.
In addition, Fitch has affirmed the following ratings:
--$769,000 South Bend Central Development Area Public Improvement Project lease rental revenue refunding bonds series 1996A at 'AA+';
--$1.2 million Blackthorn Golf Course Project lease rental revenue refunding bonds series 1998 at 'AA+';
--$8 million College Football Hall of Fame Project lease rental revenue refunding bonds series 2000 (which will be refunded with the current issue), at 'AA+';
--$5.5 million Morris Performing Arts Center lease rental revenue refunding bonds series 2009 at 'AA+';
--South Bend, Indiana implied general obligations at 'AA+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The city's strong finances, evidenced by extremely healthy reserve levels, have helped the city weather the economic recession and state enacted changes to the property tax system.
--In anticipation of the negative impact of state property tax reform, and through proactive and conservative fiscal practices, city management made strategic expenditure cuts and increased local income taxes to replace a portion of lost property tax revenue which has diversified revenues and put the city's finances on firmer ground.
--The South Bend area economy has successfully transitioned from manufacturing to service based with the University of Notre Dame continuing to be an important contributor to the economic profile of the city.
--Socioeconomic indicators are weak with a declining population, low wealth levels and although improving, continued high unemployment rates compared to state and national levels.
--The debt burden is moderate to high but should trend downwards given the above average amortization of existing debt and the city's manageable debt plans. The unfunded pension liability is notable.
KEY RATING DRIVERS:
--Maintenance of the city's ample general fund reserves is key to the city's rating in the current category.
--Long term credit quality is contingent upon the strengthening of the local economy, including a return to positive employment and housing market trends.
SECURITY:
The bonds are secured by semiannual lease payments payable to the trustee two days prior to payment on the bonds. The lease payments are payable from an ad valorem tax levied by the South Bend Redevelopment Commission (the Commission) on all taxable property in the City of South Bend Redevelopment District, an area coterminous with the city. If the leased property is damaged or destroyed, the Commission 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 Commission is required to carry physical loss insurance equal to the greater of 100% of the replacement cost of the property or amount to redeem the outstanding bonds and rental interruption insurance equal to two years. The company providing insurance must be rated at least 'B+' or better by A.M. Best Company (or comparable rating service if A.M. Best ceases to exist or rate insurance companies). The leased properties consist of the College Football Hall of Fame and the Century Center Complex.
CREDIT SUMMARY:
South Bend, the fourth largest city in Indiana, is located in north central Indiana, approximately five miles south of the Michigan border and 90 miles east of Chicago. Over the last several years, the city has successfully transitioned from manufacturing to a service based economy with the University of Notre Dame, which is adjacent to the city, anchoring the local area economy. City unemployment rates, although showing some signs of improvement, continue to be above state and national levels. As of April 2011, the city recorded an unemployment rate of 11.2%, lower than the 13.5% recorded in April 2010, but well above the 8.1% and 8.7% for the state and U.S. in April 2011. Resident wealth levels are below average, with per capital income at 79% of the state and a poverty level of 23%, almost double that of the state.
Finances have historically performed well, with general fund unreserved balances totaling over 30% for the past five years. As a result of state property tax reform ('circuit-breaker' legislation) implemented in 2009, property tax receipts have sharply declined. The circuit breaker legislation limits property taxes to a percentage of gross assessed value, depending on the class of property. In anticipation of the decline in property tax revenues, city management was proactive in reducing expenditures and putting in place new or increased local option income taxes which have partially offset the decline in property tax revenues. Despite this increased reliance upon economically sensitive income taxes amid a recession, the city's finances have not been adversely affected. The city recorded a $4.1 million (5.5% of spending) general fund net operating surplus in fiscal year (FY) 2010. Reserve levels remained solid, with an unreserved general fund balance equivalent to 38.5% of spending. When the $8.5 million in rainy day funds are added, reserves total over 50% of spending. For FY 2011, management is estimating a small ending general fund surplus (about $1 million).
Direct debt levels are moderate, but significant overlapping borrowing raises overall debt to an above average 5.4% of full value. Payout is above average, with 74% retired within 10 years. As is typical in Indiana, due to stringent restrictions on the issuance of general obligation debt, the city relies upon the use of lease rental revenue bonds. Lease rentals are payable from ad valorem taxes levied against all taxable property in the South Bend Redevelopment District, an area coterminous with the city of South Bend. The obligation to pay is not subject to appropriation, but is subject to abatement, in case of damage or destruction of the leased premises. The use of property and casualty insurance, along with rental interruption insurance sufficient to cover two years of abated rental payments, mitigates the abatement risk.
The National Football Federation (the NFF) is moving the College Football Hall of Fame (the Hall) to a new facility in Atlanta, Georgia in early 2014, and has terminated its agreement with the city effective Dec. 31, 2010. This does not pose a credit concern for Fitch, as the Hall is fit for occupancy and as such, the Commission is obligated and has the resources to continue to make lease rental payments. A transition agreement with the NFF is in place that provides for the Hall to operate in its present location through the end of 2012 and possibly 2013. The city is in the process of looking for a replacement tenant.
The majority of city employees participate in the Public Employees Retirement Fund (PERF), an agent multiple-employer defined benefit plan, administered by the state. The city continues to fund its annual required contribution as mandated by the state. PERF, which historically had been well-funded, decreased to 69% as of July 1, 2010 due to investment losses.
In addition to PERF, the city has two single employer defined benefit plans for police and firemen hired prior to 1977. As per Indiana statute requirements of funding the next year's budget expenditure, these plans have been funded on a pay-as-you-go-basis and therefore have very low funding rates of 3%. As a result of property tax reform, in 2009 the state assumed the funding of the plans. However, the net pension obligations, which are considerable, are considered an obligation of the city.
Additional information is available at 'www.fitchratings.com'
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, Zillow.com and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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