Porter County, IN Debt Rating Raised To 'AA' From 'AA-'

Porter County, IN Debt Rating Raised To 'AA' From 'AA-' On Consistently Positive Operations; Series 2023 Debt Rated 'AA'

[S&PGR Raises Porter County, IN Debt Rating To 'AA' From 'AA-']

DATELINE--S&P Global Ratings raised its long-term rating on ad valorem tax-secured debt issued by and on behalf of Porter County, Ind., to ‘AA’ from ‘AA-’. At the same time, S&P Global Ratings assigned its ‘AA’ long-term rating to the county’s expected $25 million series 2023 general obligation (GO) bonds. The outlook for all ratings is stable.

"The upgrade reflects the county’s consistently positive operating track record that has enabled steady available reserve growth, which we expect will continue, considering a healthy, property tax-driven revenue profile and manageable fixed costs," said S&P Global Ratings credit analyst Matthew Martin. The upgrade is further supported by ongoing tax base growth, coupled with the county’s adoption of generally accepted accounting principles audits (starting in 2019), which provide greater transparency regarding its finances.

Our rating reflects the strength and stability of Porter’s financial position, guided by a conservative budgeting approach, coupled with an expanding economy and favorable long-term debt and liability profile. The county also retains inherent flexibility in its comparably low tax and service fee rates that could be increased to generate additional revenue, if need be; however, this has proven unnecessary to date, considering another projected operating surplus at fiscal year-end Dec. 31, 2023. Situated approximately 50 miles southeast of Chicago, Porter continues to see population growth and significant economic development, headlined by the Double Track Northwest Indiana rail line project, which will enhance regional residents’ access to Chicago. Although we expect most credit factors will remain stable, if the county experiences any prolonged economic weakness or if it materially draws on available reserves, we could take a negative rating action.

The stable outlook reflects our expectation that the county's management team will make any necessary adjustments to keep at least balanced operations and very strong reserves in line with stated targets in the next two years. Porter's location in the Chicago-Naperville-Elgin MSA and expected tax base growth provide additional stability.

We could take a negative rating action if the county materially draws on available reserves, without a plan of replenishment in place, or if potential future issuance substantially weakens its debt profile.

A higher rating would depend on material strengthening of the county's incomes, sustained reserves at levels commensurate with those of higher-rated peers, and the adoption of formalized management policies and practices, assuming other factors remain consistent.

Credit Highlights

    • S&P Global Ratings raised its long-term rating on ad valorem tax-secured debt issued by and on behalf of Porter County, Ind., to ‘AA’ from ‘AA-’.

    • At the same time, S&P Global Ratings assigned its ‘AA’ long-term rating to the county’s expected $25 million series 2023 general obligation (GO) bonds.

    • The outlook for all ratings is stable.

    • The upgrade reflects the county’s consistently positive operating track record that has enabled steady available reserve growth, which we expect will continue, considering a healthy, property tax-driven revenue profile and manageable fixed costs. The upgrade is further supported by ongoing tax base growth, coupled with the county’s adoption of generally accepted accounting principles (GAAP) audits (starting in 2019), which provide greater transparency regarding its finances.

Security

The series 2023 GO bonds are secured by the county's ad valorem property taxes. The ad valorem property tax pledge is subject to state circuit-breaker legislation, which caps the property tax burden for taxpayers based on a percent of the real estate parcels' gross assessed value. The levy to cover debt service, however, is statutorily protected, allowing the county to distribute circuit-breaker losses first across nondebt service funds that receive property taxes. We do not distinguish the limited-tax pledge from the unlimited-tax pledge, as we expect the county will use all available resources to service the debt and base the rating on our view of its general creditworthiness.

Officials plan to use the bond proceeds to finance capital improvement projects to county facilities.

The series 2017 stormwater district revenue bonds are secured by net revenue of the county's stormwater system, and, to the extent that net revenue is insufficient, from a special benefits tax levied on all taxable property within the district, also subject to Indiana's circuit breaker. The stormwater district's tax base excludes all the territory in the county located in a municipality and certain conservancy districts. We rate the bonds based on the pledge of special benefit taxes (an ad valorem property tax), which we view as the stronger pledge.

Credit overview

Our rating reflects the strength and stability of Porter’s financial position, guided by a conservative budgeting approach, coupled with an expanding economy and favorable long-term debt and liability profile. The county also retains inherent flexibility in its comparably low tax and service fee rates that could be increased to generate additional revenue, if need be; however, this has proven unnecessary to date, considering another projected operating surplus at fiscal year-end Dec. 31, 2023. Situated approximately 50 miles southeast of Chicago, Porter continues to see population growth and significant economic development, headlined by the Double Track Northwest Indiana (DTNI) rail line project, which will enhance regional residents’ access to Chicago. Although we expect most credit factors will remain stable, if the county experiences any prolonged economic weakness or if it materially draws on available reserves, we could take a negative rating action.

The 'AA' rating reflects our opinion of the following:

    • Strong economic metrics with steady population and tax base growth, augmented by access to the Chicago-Naperville-Elgin, IL-IN-WI metropolitan statistical area (MSA);

    • Very strong institutional framework coupled with limited financial policies compared with those of peers, though standard under our Financial Management Assessment (FMA), and highlighted by an informal reserve target, regular budget monitoring with the county council, and financial forecasting;

    • Very strong reserve and liquidity profiles that reflect historically positive operations as well as added budget stability from annual investment income generated by a foundation established with the proceeds of a 2007 hospital sale;

    • Manageable debt and liability profile that we expect will remain so in the absence of material new issuance plans.

Environmental, social, and governance

We view the county's social factors as neutral but note that population growth helps support tax base and economic growth, which are stronger than those of peers in Indiana. We also view Porter's environmental and governance factors as neutral within our analysis. Relative to those of other municipalities and counties in Indiana, the county's financial reporting and adoption of GAAP audits are a governance strength, in our view, because they provide greater transparency regarding the county’s financial performance; however, this is in line with financial reporting nationally.

Outlook

The stable outlook reflects our expectation that the county's management team will make any necessary adjustments to keep at least balanced operations and very strong reserves in line with stated targets in the next two years. Porter's location in the Chicago-Naperville-Elgin MSA and expected tax base growth provide additional stability.

Downside scenario

We could take a negative rating action if the county materially draws on available reserves, without a plan of replenishment in place, or if potential future issuance substantially weakens its debt profile.

Upside scenario

A higher rating would depend on material strengthening of the county's incomes, sustained reserves at levels commensurate with those of higher-rated peers, and the adoption of formalized management policies and practices, assuming other factors remain consistent.

Credit Opinion

Strong economic metrics, with steady population and economic growth

Porter County is in northwest Indiana, about 50 miles southeast of Chicago. Valparaiso is the county seat and home to Valparaiso University. Other top employers span the manufacturing, health care, and education sectors. Routine investments in community development projects, the presence of Indiana Dunes National Park, residential and industrial growth, and access to the Chicago MSA have all played key roles in Porter’s ongoing growth and attraction. The county’s population rose by 3.5% in the past decade, while market value increased more than 48% during the same period. We expect that ongoing development will continue to support steady growth and we will monitor demographic and economic trends that may arise upon completion of the DTNI rail line.

Somewhat limited, standard FMA with effective oversight, evidenced by operational consistency

Management uses historical trends and some outside sources of data to formulate budget assumptions, which typically reflect a conservative approach. The county council receives a monthly report on operating performance, though this lacks a comparison to budget. Porter lacks long-term, rolling capital plans, but has established financial projections for the current budget year plus three forecast years. The county follows state guidelines for investments, and the commissioners receive a monthly report on investment holdings and earnings (and a quarterly investment update regarding foundation investments). It lacks formal debt and reserve policies, but informally aims to hold 20%-25% of operating expenditures in reserves, which it is currently meeting.

The institutional framework score for Indiana counties required to complete a GAAP audit is very strong.

Consistently strong operations support very strong reserve and liquidity position

Fiscal year-end Dec. 31, 2021, the third and most recent GAAP audit available, is the basis for our analysis; however, we use unaudited, cash-based reports submitted to the state as a lens into more recent financial performance. Calendar year-end 2022, albeit on a cash basis, saw the county report its ninth consecutive general fund surplus. Property tax revenue constitutes approximately 80% of general fund revenue and is the primary source of revenue for most county operations. The county’s income tax rate is tied for the lowest in the state, and the capacity to increase it remains a source of flexibility if any operating funds require additional support. Furthermore, Porter sold its hospital in 2007 and received approximately $156 million from the sale. The proceeds are held in a charitable nonprofit foundation established by the county. Pursuant to a county resolution, up to 5% of annual earnings on the foundation-held investments will be transferred to the county every year to support general operations ($7.9 million in 2021). The foundation is a related party of the county, and as of Dec. 31, 2021, it held $191.4 million in cash and investments.

As the end of fiscal 2023 approaches, officials report that strong investment and interest income, stable property tax revenue, and contained expenses should amount to another surplus. The fiscal 2024 budget reflects increased spending in the general fund for employee salaries as well as inflationary pressures related to capital items, which the 2023 budget incorporated as well. Although expenditures rose, largely due to salary raises once again, officials report that the steady countywide growth is resulting in strong property tax and income tax receipts, which should offset these higher costs. The county’s financial forecast shows steady general fund surpluses through 2026, reflecting stability in core operations; other funds’ forecasts, such as the cumulative bridge and local income tax funds, reflect some spenddown as they are dedicated more discretely to capital initiatives. Nonetheless, given its track record, we anticipate Porter will likely outperform conservative estimates. the budget could become pressured if income tax revenue falls; S&P Global Ratings' economists forecast weakening on the horizon but not an imminent recession risk. (See "Economic Outlook U.S. Q4 2023: Slowdown Delayed, Not Averted," published Sept. 25, 2023, on RatingsDirect.).

Approximately $22 million of remaining American Rescue Plan Act stimulus receipts provides stability, though we understand the county has used, and will use, this money primarily for one-time capital projects or initiatives. Officials have no plans to draw down reserves for the foreseeable future, and we expect that reserve maintenance, if not growth, will remain a credit strength.

Manageable fixed costs highlight a favorable long-term debt and liability position

Porter’s total direct debt will be approximately $71.4 million after this issuance. Officials indicate that various capital needs have been identified, particularly related to stormwater projects, and the financing is not certain at this time as the county navigates potential grant or federal funding opportunities. We will assess any future issuance’s impact as it relates to our view of the debt burden.

The county has no alternative financings such as variable-rate or bank-purchased debt obligations.

Pension and other postemployment benefits (OPEB) liabilities

We do not view pension and OPEB liabilities as an immediate source of credit pressure for the county, given that costs account for a small portion of total spending and our view of the pension plan's strong funded levels, with moderate risks of cost escalation when factoring in ongoing market volatility.

The county participates in the following plans:

    • Indiana Public Employees' Retirement Fund, 82.5% funded with a net pension liability of $16.1 million as of June 30, 2022.

    • Porter County Police Retirement Plan, 88.7% funded with a net pension liability of $2.7 million as of Dec. 31, 2021.

The county does not offer OPEB to retirees, which we view as a credit strength.

Related Research

Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S. Public Finance Credit Factors, March 2, 2022