Carmel's 'rapidly increasing debt' leads to drop in credit rating

After examing Carmel's "rapidly increasing debt burden," Standard & Poor's has downgraded the city's long-term credit rating, which could impact future interest rates.

In a letter sent to the city Tuesday, the agency said the rating on property-tax supported debt had been lowered a step from AA-Plus, its second-highest rating, to AA.

The letter noted the city has accrued $300 million in debt in the past three years, that annual debt payments will grow 71 percent by 2022, and the city has announced plans to pass more bonds in coming years.

The agency said it was particularly concerned that the city had to move money between funds to pay a portion of debt service in 2015 after overestimating tax revenues.

"In our view," the S&P letter stated, "this demonstrates the risk of high leverage and a heavy dependence on sometimes more volatile tax-increment revenues. We feel the city's crowded budget and high fixed costs leave it vulnerable to unanticipated economic or operational swings."

The agency said it was concerned about Carmel's ability to shift revenue from its general fund to cover debt service in the future, particularly in an economic downturn.

Carmel's general outlook was positive. The S&P report stated Carmel benefits from a strong local economy, generally strong financial management, budget flexibility and liquidity. The agency expected that Carmel will maintain a stable AA rating in the future.

"The stable outlook reflects our expectation that Carmel will maintain strong or better budgetary flexibility and liquidity," the report stated. "Precise forecasting is going to play a vital role, in our opinion, in ensuring the cash cushion remains adequate in light of rapidly growing debt costs."

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Noblesville and Westfield also have AA ratings. Fishers is the only city in Indiana with an AAA rating, the highest rating possible.

Mayor Jim Brainard has touted the AA-Plus credit rating for years as one of the city's strengths, including during his 2015 re-election campaign. On Wednesday, he said an AA rating still indicates the city is on sound financial footing and can continue to receive competitive interest rates.

"It is important to remember that we are a growing city, and we are investing in our local infrastructure, such as adding trails, roundabouts, better storm drainage, and high-quality water to improve the quality of life of our residents," he said.

He said the city could raise taxes to create a better financial outlook on revenues versus expenses for the S&P rating but has chosen not to.

"We have adequate balances to carry us through a recession," Brainard said. "It would be easy to raise taxes to get a perfect rating; that might make the rating agency happy, but that is not in the best interest of our taxpayers."

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Clerk-Treasurer Christine Pauley said the city is closing on $96 million in bonds and appears to be receiving competitive interest rates.

She said the downgraded credit rating could impact future bonds.

"I would recommend the mayor develop a 5-year comprehensive plan that would be reflective of the projects that he sees coming for the citizens of Carmel," she said. "It's time now that we begin to be more prudent and wise in selecting the projects that we will undertake."

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Call IndyStar reporter Chris Sikich at (317) 444-6036. Follow him on Twitter: @ChrisSikich and at facebook/chris.sikich.