DALLAS -- Indianapolis' $410 million of moral obligation debt that financed non-essential projects was dropped by one notch.
Moody's Investor Service this week downgraded the bonds to Aa3 from Aa2. The downgrade was among several Moody's made after putting 469 ratings under review at the end of July as it applied a new methodology to lease, appropriation, moral obligation and comparable debt.
The updated methodology shifted how certain debt is notched off the city's Aaa general obligation issuer rating.
The downgraded bonds are secured by tax increment financing revenue and additionally backed by the city's moral obligation. They were issued to finance economic development-related projects that Moody's considers as being less essential in nature and therefore at greater risk of default.
Before Dec. 1 of each year, the chairman of the city's bond bank is required to notify the City-County Council of the sum, if any, required to restore the debt service ratio to the minimum reserve requirement. Upon notification by the chairman, the City-County Council will review the appropriation request.
Sarah Riordan, executive director and general counsel at the Indianapolis Bond Bank, said nearly all of the downgraded bonds rely on TIF and revenues in those TIF districts produce high debt service coverage ratios making it unlikely that the moral obligation pledge would be needed.
The bonds are rated one notch below moral obligation bonds issued by the city that are "for more essential purposes," such as its series 2010F wastewater bonds which are rated Aa2, according to Moody's.
As part of the review, Moody's also downgraded the city's $1.7 million series 2009F-2 Local Public Improvement Bond Bank Bonds to Aa1 from Aaa.
Moody's said that the bonds, which are secured by the city's pledge to make lease payments, are subject to abatement risk if the assets are unable to be used and the more essential nature of the financed asset, since it's essential that the city keep paying for the jail to stay open.
The 2009F-2 bonds were used to refund bonds originally issued to finance Marion County's Jail II facility, a medium security facility in Indianapolis.
Moody's affirmed the Aaa rating on the city's $78.6 million of general obligation debt reflecting its sizeable tax base and diverse economy and healthy financial position. The ratings carry a negative outlook.
Moody's also confirmed the Aa2 rating on $26.3 million of 2005 floating rate bonds that financed an aircraft maintenance facility and the Aa2 rating on $160 million of bond bank bonds from a 2010 issue.
Over the past five years, Indianapolis' general fund balance has steadily declined from a peak of $373 million, or 41% of general fund revenues, in fiscal 2011 to $203 million in 2015. The figure still represents what's considered a strong 32% of general fund revenues.
This month, the Indianapolis City-County Council approved a $1.1 billion budget for fiscal 2017 that that calls for a $24 million decline in the general fund balance. Indianapolis is the largest city in the state with an estimated population of 862,781.
Riordan noted that the downgraded bonds financed projects were undertaken by the previous administration. She also noted that the budget of Mayor Joe Hogsett, who took office in January, holds the line on city spending and trims half of the deficit. Hogsett also pushed through a fund balance reserve policy this year, implemented strong savings initiatives and committed to protecting the city's reserves until the deficit is eliminated, she added.
