In the course of routine surveillance, Fitch Ratings has downgraded Indianapolis-Marion County Public Library, Indiana's (the library) approximately $97.7 million outstanding unlimited tax general obligation (GO) bonds to 'AA' from 'AAA', consisting of the following issues:
--$17.8 million unlimited tax, series 2007;
--$25 million unlimited tax, series 2006;
--$7.9 million unlimited tax, series 2005;
--$8 million unlimited tax, series 2003;
--$13.2 million refunding unlimited tax, series 2002;
--$25.9 million unlimited tax, series 2002A.
Fitch simultaneously withdraws its rating on the library's general obligation unlimited tax refunding bonds series 2008 because they were never issued. The Rating Outlook is Stable.
The downgrade to 'AA' reflects Fitch's belief that the library's operating pressures have increased markedly due to a combination of state legislation that restricts property tax revenue derived from the residential tax base and increased spending requirements related to the opening of a new central library in 2008. Fitch expects the library will continue to experience heightened operating pressures over the next several years as the effect of the state legislation, known as the 'circuit breaker,' widens as its full phase-in is reflected in the next two fiscal years. The downgrade also considers the depletion of general fund reserves due in part to delays in property tax assessments, a statewide phenomenon for the past three fiscal years. As a result the library, like many Indiana entities, has relied on tax anticipation warrants (TAWs) for cash flow purposes. Library management demonstrated its willingness to contain costs to offset declining property tax revenues, identifying about $3 million in budget savings in 2010; nonetheless, Fitch expects further, potentially more severe cuts could become necessary. The Stable Outlook reflects the county's well-diversified and broad local economy, limited future capital needs, and Fitch's expectation that reserves will increase to and remain at an adequate level, a key credit consideration.
Beginning with a statewide freeze of property tax levies in 2007 and widespread delays in property tax collections, IMCPL experienced significant cash flow stress and borrowed about $14 million in each of fiscal years 2008 and 2009 (FYE Dec. 31) for cash flow purposes. Fund balance drawdowns in 2007 and 2008 resulted in a negative $247,843 unreserved fund balance (negative 0.6% of expenditures and other uses). In 2007, the city-county council approved a local option income tax which yielded $1.2 million in revenue in 2008, partially offsetting the $7.2 million drop in property taxes due to the levy freeze and delayed collections; income tax revenues are projected to grow to $3.7 million in 2010. As the property tax assessment cycle is expected to normalize in 2010, the library is projecting a return to positive fund balances in fiscal 2009 and decreases in cash flow borrowing beginning in 2010.
While income taxes help mitigate the impact of the property tax levy freeze, they introduce the potential for increased revenue volatility, and the full implementation of circuit breaker legislation has resulted in substantial operating pressure. The library's 2010 budget incorporates an 18% decline in AV for 2009, which, with the circuit breaker and levy freeze, equates to $3 million in revenue loss. The library has identified cost saving measures that are expected to result in a level of cash-basis reserves at year-end in excess of the library's policy of maintaining 5-10% of budgeted spending. Management has outlined further cost saving measures for fiscal 2011 as the impact of the circuit breaker's cap on assessments is fully phased in, though efforts are difficult given increased library utilization as well as the 2008 opening of the central library. While management has been proactive in identifying spending cuts and has performed multi-year forecasting of the effect of the circuit breaker Fitch expects operating pressures will continue.
The library serves all of Marion County, except for the City of Beech Grove and the Town of Speedway, which have their own libraries. Marion County ranks as the state's largest in terms of both population and economic output. County unemployment compares favorably to state and national trends increasing to 8.4% in September 2009 from 5.7% the year prior reflecting concentration in the healthcare industry. State and national unemployment rates equaled 9.2% and 9.5% respectively for September 2009.
The library's direct debt burden is very low, although its overall debt burden, including the debt of overlapping taxing entities such as tax increment districts and the convention authority, is moderately high, equaling 6.8% of market value or $3,797 per capita. Future capital needs are minimal now that the Central Library is complete.
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or
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