2019-12-30 UST Financial Responsibility Certification

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Summary: South Bend, Indiana; General Obligation; General Obligation Equivalent Security parts of the city's budgeting process. The council sees monthly reports that contain budget -to -actuals and investment holdings. South Bend has debt and investment policies and has adopted reserve policies for all its funds, including a minimum 25% of expenditures policy for the general fund. We believe these are well-established policies and practices, which will continue to support a strong management profile in the near future. Adequate budgetary performance We have adjusted financial data to better portray what we view as a more accurate depiction of the city's recurring activity by adding recurring, below -the -line general fund transfers in and out, and removing one-time revenue and spending. In addition, our analysis considers South Bend's public safety local option income tax and county option income tax (COIT) funds as part of the general fund, given that the services rendered in these funds are highly comparable to what we consider basic general fund operations. The city reports its financial results according to generally accepted accounting principles (GAAP), unlike the vast majority of Indiana municipalities, which report on a cash basis of accounting. The Indiana State Board of Accounts has audited the 2016 Comprehensive Annual Financial Report (with a Dec. 31 year-end). South Bend's budgetary performance will remain adequate in our opinion. The city had slight surplus operating results in the general fund of 0.6% of expenditures, but a deficit result across all governmental funds of negative 1.6% in fiscal 2016. It budgeted for small operating deficits or essentially break-even results across the general and total government funds for 2017 and 2018. While the 2017 audit is ongoing, officials report South Bend ended 2017 with a $2 million general fund surplus. The city adopted a full costing model for internal services, allocating administrative and technology and innovation costs to each department. This allocation strategy encouraged departments to get a better grasp of their actual needs, yielding cost savings in various departments in 2017. South Bend's budgets are structure -balanced. Key revenue categories (the general fund derives 47.0% of its revenue from property taxes, 20.0% from income taxes, and about 5.5% from utility in lieu of taxes payments) are trending positive due to higher property assessments and collection rates and expenditures are mostly under control. Of note, the city's revenue losses caused by circuit breakers are projected to increase $12 million (an estimated 36% increase) by 2020, the year when some debt exemptions from property tax caps are set to expire. This decrease will likely translate to an approximately $3 million general fund deficit beginning 2020. Management is aware of this and developing strategies to address the matter. The city's robust accumulated reserves ($64 million) and a practice of proactive budget adjustments would allow South Bend to deal with the upcoming fiscal issues efficiently, in our opinion. Nevertheless, the looming revenue reduction is substantial, and the current forecast does not anticipate any unforeseen economic events. We will to monitor the situation and could take a negative rating action if the city's finances start to weaken. Very strong budgetary flexibility South Bend's budgetary flexibility is very strong, in our view, with an available fund balance in fiscal 2016 of 77% of operating expenditures, or $64.0 million. We expect the available fund balance to remain above 30% of expenditures for the current and next fiscal years, which we view as a positive credit factor. The balance includes $41.9 million (50.3% of expenditures) in the general fund and $22.1 million (26% of expenditures) that is outside the general fund but legally available for operations. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 13, 2018 4 20056561 301888078