S&P Boosts Indiana's Credit to AAA, Citing Strong Financial Performance

CHICAGO - Standard & Poor's Friday awarded Indiana top marks, upgrading its issuer credit rating to AAA based on a strong financial performance.

The upgrade comes a day after the state closed out its third consecutive year with a balanced budget and announced it was heading into fiscal 2009 with a $1.4 billion surplus at a time when many states are struggling with large deficits.

Standard & Poor's singled out Indiana's massive new property tax legislation for praise in its upgrade, which boosted the state's issuer credit to AAA from AA-plus.

Under the new law, the state will enact property tax caps that are estimated to lead to loss of $1 billion in annual revenue. To offset that loss, the state raised the sales tax to 7% from 6% in April, and agreed to take over much of the funding for local schools as well as some local government funding.

"Property tax reform has realigned state and local spending, clarified the state's responsibilities, and is not expected to impact the state's long-term financial performance," analyst Eden Perry said in a release announcing the upgrade.

The state also benefits from an increasingly diverse economic base that is relying less on manufacturing than in the past, and a fund balance that is expected to grow by the end of its two-year budget period that ends June 30, 2009.

Analysts also praised the state's low debt burden. Indiana issues very little general obligation debt and instead issues mostly lease-backed debt or bonds backed by a specific revenue sources. It has about $3 billion of lease-backed debt outstanding.

"We're standing on solid financial ground," state auditor Tim Berry said at a press conference last week announcing the budget surplus of $1.4 billion. "Twenty-nine states, including all of our surrounding neighbors, are experiencing fiscal difficulties while Indiana continues to have prudent reserves."

Berry said the reserves will be "vital" as the state takes on responsibility for funding most school operations, county welfare, and police and fire pension obligations under the new property tax law.

The surplus prompted Gov. Mitch Daniels on Friday to transfer $83.4 million from the general fund into the newly created state education rainy-day fund. Under the new law, Indiana was expected to transfer $50 million into the fund by the end of 2010.

As of June 30, the general fund totaled $595 million, its rainy-day fund totaled $378 million, and its so-called tuition supply fund totaled $400 million. The surplus comes despite a decline in several tax revenue categories, including significant dips in corporate income tax and gaming tax revenue.

Sales tax revenue grew between 2.5% and 3% last year, slightly lower than historic averages, but that revenue received a two-month boost from the recent increase. Personal income tax revenue grew at a strong rate of 5% last year, according to state budget director Chris Ruhl.

The $1.4 billion reserve is within the reserve range of 10% to 12% of the annual budget that the state follows, according to deputy auditor Mike Frick. Much of the $321 million surplus stemmed from Daniels' orders that state agencies trim 5% from their budgets earlier this year.

Fitch Ratings assigns an AA rating to the state's lease-backed debt. Moody's Investors Service rates the state Aa1.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER