OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the \$162 million TIFIA loan being made to the Indiana Finance Authority (IFA) by the United States Department of Transportation (USDOT) for the East End Crossing Project.

The loan will close on or about April 15, 2015, though no draw is expected until fiscal 2016. Proceeds will fund the final three milestone payments for the IFA's East End Crossing project.

The Rating Outlook is Stable.

SECURITY

The TIFIA loan is supported by a use agreement between IFA and the Indiana Department of Transportation (INDOT) pursuant to which INDOT will seek biennial legislative appropriations equivalent to debt service, and ultimately a loan agreement between IFA and USDOT pursuant to which IFA covenant to do all things lawfully within its power to obtain and maintain the funds necessary for repayment, subject to biennial legislative appropriation.

KEY RATING DRIVERS

APPROPRIATION PLEDGE SUPPORTS REPAYMENT: TIFIA loan repayment relies on substantial completion of the project and biennial legislative appropriations from the state's general fund. The timing and legal terms around the TIFIA loan mitigate completion risk concerns, and appropriation risk is mitigated by the state's reliance on similarly-structured appropriation debt to fund its capital program and the requirement of legislative approval for projects and financings, including the East End Crossing project. Fitch rates the loan in line with appropriation debt, and one notch below the state of Indiana's implied GO ('AAA'; Stable Outlook), as the legal terms and commitments on the part of the state mirror those for its appropriation bonds. IFA intends to disclose this loan on its annual debt statement, alongside the state's appropriation debt.

LOW DEBT BURDEN: Indiana's low debt burden is one of the key credit strengths underlying its high rating. Most of the state's net tax-supported debt burden covers transportation needs, including those funded through public-private partnerships. Indiana expects a portion of the public-private partnership obligations to be self-supporting from toll revenues.

HIGH RESERVE LEVELS: Indiana's budget management is strong and the state prudently used the recovery from the recession to build up and maintain solid reserves. Revenue forecasts have been revised downwards, but Fitch anticipates the state will manage to a stable fiscal profile.

MANUFACTURING-HEAVY ECONOMY: An economy that remains considerably concentrated in manufacturing, particularly transportation equipment, exposes the state to economic downturns and emphasizes the importance of Indiana's reserve balances.

RATING SENSITIVITIES

The rating is sensitive to shifts in the state's implied GO rating, to which this rating is linked.

CREDIT PROFILE

The TIFIA loan is structured identically to the IFA's appropriation-backed debt issued on behalf of the state, and the IFA's commitment in recent public private partnership (P3) transactions, including the East End Crossing project which this loan will support. Indiana does not issue general obligation bonds and relies on IFA appropriation-backed debt to support its capital needs. For this TIFIA loan, the terms of the loan agreement between IFA and USDOT, and a use agreement between IFA and INDOT parallel those used for appropriation debt and recent Indiana P3 transactions.

In all cases, IFA commits to making all lawful efforts to obtain biennial legislative appropriations sufficient for regular payments to a trustee for distribution. Fitch views completion and operational risk as muted under the terms of the loan and use agreements, and accordingly, Fitch links the rating on the TIFIA loan directly to the state's implied GO rating of 'AAA'.
The 'AAA' implied GO reflects Indiana's historical pattern of low debt, balanced financial operations, and a commitment to funding reserves to provide a cushion in times of economic and revenue decline. These strengths are offset by an economy that, despite ongoing diversification, remains heavily concentrated in the cyclical manufacturing industry.

IFA is pursuing the loan to finance the anticipated mismatch between the final three milestone payments for the East End Crossing Project and anticipated state appropriations. The East End Crossing project is a public private partnership (P3) entered into by IFA (for the state) as part of a bi-state initiative with the commonwealth of Kentucky to improve cross-border linkages across the Ohio River and into the Louisville metropolitan area.

IFA engaged WVB East Partners via an availability P3 procurement to design, build, finance, operate and maintain the East End Crossing bridge and certain related approach roadways (Fitch rates WVB's private activity bonds 'BBB' with a Stable Outlook). As part of the transaction, IFA committed to making a series of milestone payments (MPs) as WVB achieved specified construction milestones, and planned to pay them largely from planned state appropriations. The original financing plan for the project acknowledged the mismatch between appropriations and the final three milestone payments. IFA views the TIFIA loan as its preferred financing approach to cover the \$162 million gap.

LOAN TERMS SET STATE LINKAGE

Under the use agreement, IN DOT's use payments used to repay the loan begin after the project's substantial completion, but an IFA covenant under the loan agreement commits the authority to seeking sufficient appropriations even prior to substantial completion. A portion of the TIFIA loan will be drawn prior to substantial completion (\$67 million), while the majority will be drawn down after substantial completion (\$95 million). Fitch does not view the partial drawdown prior to substantial completion as creating completion risk that constrains the rating. The loan agreement specifies the TIFIA loan can only be drawn for the final three milestone payments (including substantial completion), which are scheduled for July 1, 2016 or later under the concession agreement for the East End Crossing P3.

Per the January 2015 construction update from WVB, the first of these milestones is on schedule for July 8, 2016, just over three months before projected substantial completion on October 31, 2016. In addition, the TIFIA loan includes a capitalized interest period and under the loan agreement, the first loan payment to TIFIA will be at the earlier of six months after substantial completion or March 1, 2018(17 months after projected substantial completion). Finally, under the loan agreement, the IFA covenants to seek sufficient appropriations to meet its obligations to TIFIA if IN DOT has failed to do so, regardless of substantial completion. These terms mitigate the risks of drawing down a portion of the TIFIA loan before IN DOT's use payments are available to make repayments.

Fitch links the rating on the loan directly to Indiana's implied GO rating. The commitment on the part of the state, acting through the IFA, to ensure repayment on the loan is very similar to the legal commitment laid out in the IFA's appropriation-backed direct debt, which Fitch rates one notch off the state's implied GO. In the use agreement between Indiana's Department of Transportation (IN DOT) and IFA for this loan, IN DOT agrees to make payments to IFA (use payments) to allow IFA to make the loan payments under the loan agreement with TIFIA, subject to biennial legislative appropriation. In order to secure funds for these payments, IN DOT covenants in the use agreement to request sufficient appropriations from the legislature as part of the normal state budgetary process. Under the loan agreement, IFA covenants to make all lawful efforts to ensure sufficient appropriation to make loan repayments, including seeking the appropriation itself from the state legislature if IN DOT fails to do so.

IFA's appropriation-backed debt has similar covenants and commitments on the part of state agencies (like IN DOT) and the IFA, in lease agreements and trust indentures. The 'AA+' rating, one notch from the implied GO, reflects Fitch's view that the credit quality of the loan is in line with that of the IFA's appropriation-backed bonds because the legal commitments and terms mirror those for the IFA's state appropriation-backed debt.

LIMITED LONG-TERM LIABILITY DEMANDS

Low debt is a principal credit strength for Indiana. The state's net tax-supported debt (NTSD) of \$2.4 billion equates to a modest 1% of personal income. Indiana's constitution prohibits general obligation debt. The state meets the bulk of its capital needs through debt issuance by the IFA secured by biennial state lease-rental appropriations. Fitch's NTSD calculation excludes bonds issued by IFA to support construction of a convention center and football stadium which have a demonstrated record of more than three years of self-support from local taxes.

Fitch's NTSD calculation for Indiana includes availability and milestone payment (AP and MP) commitments for P3 transportation projects which Fitch views as long-term state obligations. Under terms of the AP and MP agreements and related contracts, Indiana pays private operators fees based on the successful completion and continued operation of the projects. The state anticipates a portion of the P3 projects will be self-supporting from toll revenues but, subject to terms of the various agreements for the projects, Indiana remains committed even if such revenues are insufficient.

Indiana's unfunded pension obligations are modest, with the largest liability for a long-closed plan that has a significant reserve fund set aside to mitigate annual contribution growth pressure. The state's aggregated unfunded pension liabilities totaled \$12.7 billion as of June 30, 2013. Combined debt and pension liabilities represent 5.9% of 2013 personal income, below the median for U.S. states. The vast majority (\$11.2 billion) of the unfunded pension liability is for the closed pre-1996 Teachers Retirement Fund (TRF) plan. The TRF plan is a defined benefit plan intended to be funded on a pay-as-you-go basis and beginning in 1995 the state established a Pension Stabilization Fund (PSF) to provide additional resources to manage the annual contributions. As of June 30, 2013 the PSF held approximately \$2.6 billion and was expected to allow the state to cap annual increases in general fund appropriations for the pre-1996 TRF to 3% through fiscal 2018. Thereafter, the state projects the PSF will allow smaller yoy increases in general fund appropriations before appropriations begin declining steadily in fiscal 2037.

WELL-MANAGED FISCAL POSITION

Indiana's budgeting has been strong, with a focus on structural solutions to close budget gaps. After a budget is enacted, the budget agency has significant statutory authority to administer the budget and scale back spending as needed, allowing the state to be responsive to changing conditions. The state utilized those controls during fiscal 2014 when revenues trended lower than budgeted, and again this year. Given the timely and responsive action, Indiana managed to another operating surplus in 2014 and kept reserves well-funded despite a modest and unanticipated decline in general fund revenues.

The state maintained budget balance and a solid reserve position despite significant economic and revenue weakening in the recession. Combined fund balances dropped from \$1.4 billion at the end of fiscal 2009 (about 11% of operating revenues) to a still meaningful \$831 million at the end of fiscal 2010. By the end of fiscal 2012, the state reported an increase in balances to \$2.16 billion, or 15% of operating revenues. Since then, the state's combined fund balances have been at or near this level, declining to meet the statutory reserve maximum of 12.5% of operating revenues as of June 30 in odd years, the end of each biennial budget. At the end of fiscal 2014, the state reported \$2 billion in combined fund balances providing a substantial financial cushion of 13.9% of operating revenues. The bulk of the combined fund balance is in the form of general fund balance with smaller portions in a Medicaid reserve, the rainy day fund, and a tuition reserve for K-12 education.

Fitch views recent revenue weakness as a temporary and manageable event. For fiscal 2014, Indiana's general fund revenues declined 0.4% yoy, which the state noted early on in the fiscal year and addressed quickly. The governor imposed a 3% spending reversion on agencies at the start of the fiscal year. In December 2013 he implemented an additional set of reversions as revenue reports indicated underperformance, and the state incorporated the weaker revenue trends in an updated forecast. Following these actions, Indiana ended the year with a \$106.8 million operating surplus. The state attributes a portion of the revenue decline to a falloff in personal income tax revenues (which declined 1.6% yoy) due to one-time income acceleration in the prior year because of federal tax changes. Fitch notes multiple states reported personal income tax weakening in fiscal 2014, attributed largely to the same reason. Prior to fiscal 2014, the state had seen three consecutive years of yoy operating revenues growth. Personal income and sales tax comprise approximately 80% of general fund revenues.

The December 2013 revenue forecast calls for revenue growth in fiscal 2015, but reflecting the fiscal 2014 revenue weakness, the growth projection for fiscal 2015 is from a lower fiscal 2014 base than had originally been budgeted. The 2013 legislature enacted a personal income tax cut package with the initial phase effective Jan. 1, 2015. In 2014, the legislature enacted an additional set of modest tax cuts. The state estimates that the cumulative tax cuts will reduce general fund revenues by approximately \$500 million once fully implemented over the next several years. Given its continued prudent budget management, including ongoing spending reversions, Fitch expects the state should end the year in structural balance with stable reserves.

Revenue in fiscal 2015 trails projections, but the state has taken adequate measures to control spending to offset the shortfall. Through January 2015, general fund revenues lag the revised December 2014 forecast by 1.1%, or \$89.2 million. Personal income tax revenues have been particularly weak relative to the forecast, down 4.1% (\$125 million) from the forecast. Growth in other revenues relative to the forecast offsets the personal income tax shortfall.

MANUFACTURING-DEPENDENT ECONOMY

Despite ongoing diversification, Indiana's economy remains highly dependent on manufacturing, which makes up about 17% of employment and 22% of earnings in the state compared to 9% and 10%, respectively, for the U.S. As a result, the state is prone to large swings in conjunction with national business cycles. The state's seasonally adjusted monthly non-farm payroll employment declined 8.6% from its pre-recession peak to recessionary trough, versus a 6.3% decline for the nation. The state's unemployment rate rose as high as 10.8% in June 2009.

Indiana's economic rebound from the recession has been solid with 9.5% growth in payrolls since its recessionary trough in July 2009 versus 8.9% growth for the U.S. since its trough in February 2010. The state's yoy employment growth trends are slightly lagging the nation more recently. As of February 2015, the state recorded 1.9% yoy growth in the three-month moving average for non-seasonally adjusted payrolls, versus 2.3% for the U.S. The February 2015 unemployment rate was 5.9%, just above the national rate of 5.5%. After spiking during the worst of the recession, Indiana's unemployment rate has moved generally in line with the national rate.