Chattanooga Gets AA+ Bond Rating For $171.7 Million

Thursday, September 12, 2013

Fitch Ratings has affirmed the following ratings for Chattanooga bonds:

--$171.7 million outstanding GO bonds at 'AA+.

In addition, Fitch affirms the following outstanding debt issued by the Industrial Development Board of the city of Chattanooga (IDB):

--$114.5 million lease rental revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable from unlimited ad valorem taxes to be levied on all taxable property within the boundaries of the city and carry the city's full faith and credit pledge. The IDB bonds are secured by payments equal to debt service, which the city has covenanted to fund with various city revenues. In the event those revenues prove insufficient, the city agrees to budget and appropriate sufficient monies to pay all basic rent.

KEY RATING DRIVERS

SOUND FINANCIAL MANAGEMENT: Expenditure reductions coupled with historically conservative budgeting and a willingness to raise revenues have enabled the city to maintain sound reserves and financial cushion.

ENCOURAGING EMPLOYMENT PROSPECTS: The city's diverse economy benefits from the increasing presence of health care, insurance, and higher education, supplementing the traditional underpinnings of manufacturing and transportation.

BELOW-AVERAGE ECONOMIC INDICATORS: Unemployment remains above the national average. The high poverty rate contributes to below-average wealth levels.

MODERATE DEBT BURDEN: Debt levels should remain moderate given limited borrowing needs and prospects for tax base growth.

LEASE RENTAL BUDGETING AND APPROPRIATION: The 'AA' rating on the lease rental bonds reflects the city's inherent credit characteristics and covenant to budget and appropriate sufficient funds for debt service, should other city revenues pledged to debt service payments prove insufficient.

RATING SENSITIVITIES

The ratings are sensitive to shifts in fundamental credit characteristics, including improved socio-economic metrics. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Chattanooga is located in southeastern Tennessee in Hamilton County (GO bonds rated 'AAA', Outlook Stable by Fitch) and serves as the regional economic center of a six-county metropolitan statistical area. The city's 2012 estimated population of 171,279 has grown at around the national average since the last census, demonstrating a resurgence of the area after population declines in the 1980s.

DIVERSE ECONOMY WITH TRADITIONAL ROOTS

Health care, insurance, higher education, retail, and transportation companies as well as a growing energy presence stabilize the city's economy. The city's Riverwalk, available outdoor activities, and historical sites have augmented its attractiveness as a tourist destination. Manufacturing remains above the state and national averages but no longer dominates the economy, as was the case several decades ago. Somewhat offsetting this sector's concentration is the increase in technologically advanced manufacturing. The region is the first nationwide to offer internet service at gigabit speed to all residences and businesses. Fitch believes that the ability to deploy data at significant speeds will aid the city in attracting additional commercial and industrial enterprises.

City unemployment at 9.9% in June 2013 remains well above regional and national levels. Unemployment increased over the past year from 9.4% in June 2012, in contrast to the nationwide downward trend, due to a decline in employment. Wealth levels are generally below the state and national averages, although the city's low cost of living somewhat compensates for the below-average indicators.

STRONG FINANCIAL PROFILE

Healthy reserve levels, conservative budgeting, and a willingness to raise revenues underscore the city's financially sound position. The city concluded fiscal 2012 with a $12.7 million surplus, equal to 5.8% of spending. This surplus, along with a comparable one in fiscal 2011, was attributable to a notable property tax rate hike. The increased revenue provided the city with the flexibility to restore frozen positions, fully fund the other post-employment annual required contribution (ARC), address infrastructure requirements and boost reserves. At the end of fiscal 2012 the uncommitted fund balance equaled a sound 23.3% of spending.

The city preliminarily anticipates increasing total fund balance by approximately $6.8 million when fiscal 2013 results are finalized. Total revenues are estimated to grow about 2.5%, with sales and other local tax recoveries offsetting the relatively flat property taxes. Expenses were well under budget.

The $213 million fiscal 2014 budget represents a small 1.5% increase over the fiscal 2013 budget. The city has appropriated about $2 million in reserves for capital projects. Fitch notes the city's history of conservative revenue estimation and consistent expenditure control, resulting in a reduction or elimination of planned fund balance use.

MODERATE DEBT BURDEN

Overall debt levels are moderate at $2,700 per capita and 3.0% of market value. Amortization is slightly above average with 55% of principal maturing within 10 years. Fitch notes positively that the city has dedicated tax revenue sources to meet debt service payments on debt issued for economic development projects.

The city's $441 million fiscal 2014-fiscal 2018 capital improvement plan includes $132 million for sewer system compliance with a consent decree and $52 million for a federally funded tunnel reconstruction. Tax-supported debt is expected to comprise just 17% of funding, and pay-as-you go funding is budgeted at a notable 10%.

CITY ADDRESSING LONG-TERM PRESSURES

Pension contributions have escalated recently, although Fitch believes that the city will ultimately control pension costs. The city administers two single-employer defined benefit plans, one for general employees and the other for police officers and firefighters. The ARC for general employees increased by $2.1 million or 0.8% of governmental spending in fiscal 2012 due to more employees than anticipated in the prior actuarial study, salaries, and investment losses, as well as changes in actuarial assumptions. The city decided to phase in the increases over five years, although officials currently anticipate achieving full ARC funding by fiscal 2014. Similar employment and actuarial factors will lead to a comparable increase in the fiscal 2014 ARC for the police officer and firefighters' pension. The city will implement the increase in the same year.

The funding for both pensions, using a Fitch adjusted funded ratio of 7%, approximates a somewhat weak 68%. City officials are considering various options to address the unfunded liability.

The city is fully funding its OPEB ARC. Total fiscal 2012 carrying costs equaled 18.6% of total governmental spending. Fitch considers this a moderate burden and believes that the city's conservative financial management will enable it to successfully assume the increased pension burden.

LEASE RENTAL BOND RATINGS INCORPORATE APPROPRIATION RISK

The lease rental bonds are payable and secured by payments equal to debt service to be made by the Chattanooga Downtown Redevelopment Corp. under a loan agreement. As security, the issuer has assigned to the trustee for the benefit of bondholders all of its right, title, and interest in the loan agreement, the assignment, and the lease pertaining to a conference center and parking garage, including the basic rent payable.

The city has covenanted to fund its obligations to pay rent under the lease with various city revenues including the quarter-cent sales tax, state contribution to the city, net income generated from the Chattanoogan (a conference facility), and interest on the debt service reserve fund. In the event those revenues are insufficient, the city agrees to budget and appropriate sufficient monies to pay all basic rent. The rent continues as an obligation until full payment is remitted.

Bonds have been self-supporting (without the city's covenant support) since fiscal 2001 and coverage of annual debt service has ranged from 1.2x to 1.8x. Coverage equalled 1.4x in both fiscal 2012 and 2013. While Fitch notes the sufficiency of pledged revenues, it is not a factor in the rating. 


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