Posey County, Indiana Posey County Indiana Jail Building Corp.; Appropriations

Summary: Posey County, Indiana Posey County Indiana Jail Building Corp.; Appropriations Primary Credit Analyst: John Sauter, Chicago (1) 312-233-7027...
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Posey County, Indiana Posey County Indiana Jail Building Corp.; Appropriations Primary Credit Analyst: John Sauter, Chicago (1) 312-233-7027; [email protected] Secondary Contact: Kathryn A Clayton, Chicago (1) 312-233-7023; [email protected]

Table Of Contents Rationale Outlook Related Research

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Summary:

Posey County, Indiana Posey County Indiana Jail Building Corp.; Appropriations Credit Profile US$12.9 mil lse rental rev bnds (Posey Cnty) ser 2016 due 01/15/2036 Long Term Rating

AA-/Stable

New

Rationale S&P Global Ratings assigned its 'AA-' long-term rating to Posey County Indiana Jail Building Corp.'s series 2016 lease rental revenue bonds, issued on behalf of Posey County, Ind. The outlook is stable. The bonds are secured by semiannual lease rentals paid by the county directly to the trustee. Lease rentals are payable from ad valorem property taxes, as well as by county option income taxes (COITs). The county intends to use COIT revenues to pay debt service, and forego a tax levy. In our view, there is minimal risk in not levying the property tax in anticipation of COIT revenues, despite the lack of a debt service reserve fund. The county receives its COIT certification number from the state in the fall, so it will know if COIT revenues will be sufficient to cover debt service before it has to set its annual tax levy. There is no history of the state paying less than certified amounts of COIT revenues, as the figure is set on collections already made. The 'AA-' rating solely reflects the ad valorem tax pledge, which we view as the stronger of the two. The ad valorem tax pledge is subject to Indiana's circuit-breaker legislation (which limits an individual taxpayers tax liability to a specified percentage of their property's gross assessed value [AV]), though debt service is a statutorily protected levy, with any losses due to the circuit breaker required to be distributed, first, across nondebt service levies. We do not make a rating distinction due to this tax limitation. Also, the tax pledge is not subject to appropriation. The lease payments are subject to abatement, however, if the leased property becomes damaged or destroyed, though abatement risk is mitigated, in our view, by lease provisions requiring the county maintain property casualty and two years of business interruption insurance. The county plans to use bond proceeds, in addition to more than $3.5 million of cash on hand, to renovate and expand the county jail. The 'AA-' rating reflects our view of the county's: • Weak economy, with concentrated employment base and local tax bases; • Adequate management, with "standard" financial policies and practices under our financial management assessment (FMA) methodology; • Strong budgetary performance, with operating surpluses in the combined general fund and at the total governmental

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Summary: Posey County, Indiana Posey County Indiana Jail Building Corp.; Appropriations

fund level in fiscal 2015; • Very strong budgetary flexibility, with a high available cash reserve in fiscal 2015 at 122% of operating expenditures; • Very strong debt and contingent liability position, with no debt service paid from governmental funds, net direct debt at 57.9% of total governmental fund revenue, and low overall net debt at less than 3% of market value; and • Strong institutional framework score.

Weak economy We consider Posey County's economy weak. The county has an estimated population of 25,316 in the far southwest corner of the state, bordering both Illinois and Kentucky. The county seat of Mt. Vernon is about 20 miles west of Evansville. The county has a projected per capita effective buying income of 106.1% of the national level and per capita market value of $107,244. Overall, market value was stable over the past year at $2.7 billion in 2016. Weakening Posey County's economy are a concentrated employment base, with a single sector accounting for more than 30% of total county employment, and a concentrated local tax base, with the 10 largest taxpayers accounting for 44.0% of the total tax base. The county unemployment rate was 3.9% in 2015. Posey County participates in the Evansville metropolitan area, yet we understand it is a net gainer in terms of people coming in for work compared to those working outside its borders. The county has a heavy manufacturing presence, including four of the top five taxpayers and the top three employers. Manufacturing accounts for 31% of county employment, which we view negatively. We also negatively factor the tax base concentration. SABIC Innovative Plastics accounts for 23.6% of net AV, and Southern Indiana Gas & Electric another 6.8%. If tax base concentration among the top ten taxpayers grows over 45%, it would further weaken the economy score. SABIC is the leading employer (1,200 jobs) and is undergoing a $580 million expansion, according to management. Based on the prior ten years and projections for the next ten, there is a population decline averaging 5.1%. However, given recent job base expansion and several announcements of major investments, we do not anticipate population decline accelerating in the near term.

Adequate management We view the county's management as adequate, with "standard" financial policies and practices under our FMA methodology, indicating the finance department maintains adequate policies in some, but not all, key areas. Key management practices include monthly budget progress reports to the commission, as well as monthly treasurer reports. Investment guidelines are adopted annually. There is no formal debt or reserve policy, but an informal reserve target is widely communicated and adhered to. The budget process incorporates reviews of multiple years of line-item history and inputs from the department of local government finance. There is no long-term financial forecasting or a formalized capital improvement plan.

Strong budgetary performance Posey County's budgetary performance is strong, in our opinion. The county had operating surpluses at 5.8% of expenditures in the combined general fund and 14.9% across all governmental funds in fiscal 2015. Our assessment accounts for the fact that we expect budgetary results could deteriorate somewhat from 2015 results in the near term. Our analysis combines the COIT fund with the general fund as the main operating funds, given the unrestricted nature of the fund and its supporting of general fund routine expenditures.

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Summary: Posey County, Indiana Posey County Indiana Jail Building Corp.; Appropriations

Property taxes represent 62% of combined operating revenues, and income taxes another 15%. Both of these main revenue sources have been steady. Aside from a planned use of cash reserves to support the jail project, the county anticipates balanced operating results in fiscal 2016. Beginning in 2017, it will collect a new public safety income tax used mostly to offset the use of COIT revenues on the series 2016 bonds' debt service. Based on historical performance, which we do not expect to deviate in the future, and new revenues starting next year, we anticipate that financial results will remain balanced, but that general fund surpluses in excess of 5% of expenditures are not likely to persist.

Very strong budgetary flexibility Posey County's budgetary flexibility is very strong, in our view, with a high available cash reserve in fiscal 2015 at 122% of operating expenditures, or $13.1 million. We expect the available cash reserve to remain above 75% of expenditures for the current and next fiscal years, which we view as a positive credit factor. The cash reserve includes $8.4 million (78.0% of expenditures) in the combined general fund and $4.7 million (44%) that is outside the general fund but legally available for operations. Weakening budgetary flexibility, in our view, is Posey County's use of cash accounting, which reduces clarity about the amount of funds that are truly available. Along with the combined general and COIT funds as the operating fund, available reserves include the following unrestricted, nongeneral available funds: rainy day, county economic development income tax, cumulative capital development, and riverboat gaming. To support the jail project, the county plans to contribute $1.6 million of cash on hand from the COIT fund and $2 million from the rainy day fund. Management reports no other plans to spend down these funds. Holding all other operating and nongeneral available reserves flat, which is management's forecast, the total available reserve would remain at approximately $9.5 million, or 88% of expenditures. While a large portion of the available reserves lay outside of the general fund and in funds primarily used for economic development and capital, we still anticipate that total available reserves will remain above 75% of expenditures. For the combined general and COIT fund, management targets a six-month (50%) cash balance, to protect against any potential delayed property tax distributions.

Very strong liquidity In our opinion, Posey County's liquidity is very strong, with total government available cash at 100.6% of total governmental fund expenditures in 2015. In our view, the county has strong access to external liquidity if necessary. The county does not currently have any debt outstanding aside from a small emergency 911 equipment lease, but it does have history of issuing debt in the last 10 years, so we consider access to liquidity strong. It does not engage in any permissive investments, rather, all cash is invested locally and mostly in CDs and checking accounts. The county does not have any direct-purchase debt obligations or other potential contingent liabilities. We anticipate liquidity will remain very strong.

Very strong debt and contingent liability profile In our view, Posey County's debt and contingent liability profile is very strong. Posey County does not currently pay any debt service out of governmental funds, but net direct debt is 57.9% of total governmental fund revenue. Overall

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Summary: Posey County, Indiana Posey County Indiana Jail Building Corp.; Appropriations

net debt is low at 1.2% of market value, which is, in our view, a positive credit factor. The series 2016 bonds will represent the only debt liability of the county, aside from the $40,000 outstanding equipment lease. It does not have any additional debt plans at this time. Amortization of debt is slow, at 35% principal retirement within ten years. We anticipate debt service carrying charges will remain below 8% of expenditures once full debt service materializes after 2019. The county made its full annual required pension contribution in 2015, which was $762,000, or 4% of adjusted total governmental funds expenditures. It participates in two single-employer defined-benefit pension plans (county police retirement and county police benefit), as well as the state's multiemployer defined-benefit Public Employee Retirement Fund. The two county plans have funded levels of 98% and 95%, and the total unfunded liabilities are only $68,000. The state plan has a funded ratio of 77.3% on $17.98 billion of actuarial accrued liabilities at fiscal year-end 2015. The county does not provide retiree health care benefits.

Strong institutional framework The institutional framework score for Indiana counties is strong.

Outlook The stable outlook reflects our expectation that Posey County will maintain its very strong available cash reserves and operationally balanced financial results, given its stable revenues and low fixed costs. While the county has both tax base and employment concentration, we do not anticipate deterioration in the population or job base. Therefore, we do not anticipate changing the rating within the two-year outlook horizon.

Upside scenario We could raise the rating if there is softening of either the tax base or employment concentration, which would likely be outside of the outlook horizon. More formalized financial management practices could also contribute to a higher rating in the future.

Downside scenario We could lower the rating if the budget falls out of balance and, or if cash reserves are drawn down by substantial amounts.

Related Research • S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013

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

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Summary: Posey County, Indiana Posey County Indiana Jail Building Corp.; Appropriations

located in the left column.

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