Fitch Ratings has downgraded the city of Chattanooga ratings to 'AA+' from 'AAA'.
Mayor Tim Kelly said the change was "as a result of Fitch instituting new criteria for its rating system."
He said Chattanooga "is just one of 550 local governments expected to have their Fitch rating changed as a result of the new criteria."
Mayor Kelly said, “Nothing about Chattanooga’s finances has changed, but Fitch has changed their rules. We are one of more than 500 local governments expected to be affected by the new Fitch criteria.
"While we certainly have some disagreements with this new methodology, AA+ is an excellent rating, and we are still rated AAA by S&P. Thanks to years of responsible, conservative budgeting, city government is in very strong financial shape.”
He said this change will not impact the issuing of bonds by the Chattanooga-Hamilton County Sports Authority for the South Broad stadium project. Those bonds have been issued a AAA rating by Standard & Poor.
Fitch said the ruling affects:
-Issuer Default Rating (IDR);
-General obligation (GO) bonds.
Fitch said of Chattanooga:
The Rating Outlook is Stable. The ratings have been removed from Under Criteria Observation.
The downgrade of the IDR and GO bond rating to 'AA+' from 'AAA' reflects the implementation of Fitch's new "U.S. Public Finance Local Government Rating Criteria." The downgrade is driven by a more explicit incorporation of demographic and economic factors under the new criteria, with the city's population trend assessed as 'weak' and 'midrange' demographic and economic level metrics, which balance a high degree of educational attainment against low MHI relative to the Fitch-rated local government portfolio.
The rating also reflects a population and local economy of sufficient size and diversification, respectively, and the city's moderate long-term liability burden resulting in a composite assessed at 'midrange'.
The 'AA+' ratings are buttressed by the city's 'aaa' financial resilience assessment given an 'ample' degree of budgetary flexibility supported by its broad legal control over ad valorem property taxes and employee wages and benefits in the absence of collective bargaining. The assessment reflects Fitch's expectations that reserves will be maintained above 7.5% of spending and transfers out, compared to the current level of about 40% of spending (and at least 20% of spending over the prior decade).
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--A decline in available general fund reserve levels sustained below 7.5% of spending which would lower Fitch's assessment of financial resilience to below 'aaa';
--An approximate 10% increase in long-term liabilities associated with debt, net pension liabilities and/or fixed carrying costs, assuming current levels of personal income, governmental resources and spending.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--A sustained, approximate 60% decrease in long-term liabilities associated with debt, net pension liabilities and/or fixed carrying costs, assuming current levels of personal income, governmental resources and spending;
--A sustained improvement in the city's demographic and economic strength metrics.
SECURITY
The GO bonds carry the city's full faith and credit pledge and are payable from an unlimited ad valorem tax levied on all taxable property within the city.
FITCH’S LOCAL GOVERNMENT RATING MODEL
The Local Government Rating Model generates Model Implied Ratings, which communicate the issuer's credit quality relative to Fitch's local government rating portfolio. (The Model Implied Rating will be the Issuer Default Rating except in certain circumstances explained in the applicable criteria.) The Model Implied Rating is expressed via a numerical value calibrated to Fitch's long-term rating scale that ranges from 10.0 or higher (AAA), 9.0 (AA+), 8.0 (AA), and so forth down to 1.0 (BBB- and below).
Model Implied Ratings reflect the combination of issuer-specific metrics and assessments to generate a Metric Profile and a structured framework to account for Additional Analytical Factors not captured in the Metric Profile that can either mitigate or exacerbate credit risks. Additional Analytical Factors are reflected in notching from the Metric Profile and are capped at +/-3 notches.
RATINGS HEADROOM & POSITIONING
Chattanooga Model Implied Rating: 'AA+' (Numerical Value: 9.08)
-- Metric Profile: 'AA+' (Numerical Value: 9.08)
-- Net Additional Analytical Factor Notching: 0.0
Chattanooga's Model Implied Rating is 'AA+'. The associated numerical value of 9.08 is at the lower end of the 9.0 to 10.0 range for its current 'AA+' rating.
KEY RATING DRIVERS
FINANCIAL PROFILE
Financial Resilience - 'aaa'
Chattanooga's financial resilience is driven by the combination of its 'High' revenue control assessment and 'High' expenditure control assessment, culminating in an 'Ample' budgetary flexibility assessment.
-- Revenue control assessment: High
-- Expenditure control assessment: High
-- Budgetary flexibility assessment: Ample
-- Minimum fund balance for current financial resilience assessment: >=7.5%
-- Current year fund balance to expenditure ratio: 39.5% (2023)
-- Five-year low fund balance to expenditure ratio: 28.5% (2023)
Revenue Volatility - 'Strongest'
Chattanooga's weakest historic three-year revenue performance is neutral to the Model Implied Rating.
The revenue volatility metric is an estimate of potential revenue volatility based on the issuer's historical experience relative to the median for the Fitch-rated local government portfolio. The metric helps to differentiate issuers by the scale of revenue loss that would have to be addressed through revenue raising, cost controls or utilization of reserves through economic cycles.
-- Lowest three-year revenue performance (based on revenue dating back to 2005): 5.3% increase for the three-year period ending fiscal 2010
-- Median issuer decline: -4.5% (2023)
DEMOGRAPHIC AND ECONOMIC STRENGTH
Population Trend - 'Weak'
Based on the median of 10-year annual percentage change in population, Chattanooga's population trend is assessed as 'Weak'.
Population trend: 0.7% Analyst Input (39th percentile) (vs. 0.7% 2022 median of 10-year annual percentage change in population)
Unemployment, Educational Attainment and MHI Level - 'Midrange'
The overall strength of Chattanooga's demographic and economic level indicators (unemployment rate, educational attainment and median household income [MHI]) in 2023 are assessed as 'Midrange' on a composite basis, performing at the 43rd percentile of Fitch's local government rating portfolio. This is due to high education attainment levels offsetting low median-issuer indexed adjusted MHI and midrange unemployment rate.
-- Unemployment rate as a percentage of national rate: 100.0% 2023 (46th percentile), relative to the national rate of 3.6%
-- Percent of population with a bachelor's degree or higher: 34.1% (2022) (61st percentile)
-- MHI as a percent of the portfolio median: 81.9% (2022) (22nd percentile)
Economic Concentration and Population Size - 'Strongest'
Chattanooga's population in 2022 was of sufficient size and the economy was sufficiently diversified to qualify for Fitch's highest overall size/diversification category.
The composite metric acts asymmetrically, with most issuers (above the 15th percentile for each metric) sufficiently diversified to minimize risks associated with small population and economic concentration. Downward effects of the metric on the Metric Profile are most pronounced for the least economically diverse issuers (in the 5th percentile for the metric or lower). The economic concentration percentage shown below is defined as the sum of the absolute deviation of the percentage of personal income by major economic sectors relative to the U.S. distribution.
-- Population size: 187,030 Analyst Input (above the 15th percentile) (vs. 184,038 2022 Actual)
-- Economic concentration: 19.0% (2023) (above the 15th percentile)
LONG-TERM LIABILITY BURDEN
Long-Term Liability Burden - 'Midrange'
Chattanooga's liabilities to governmental revenue have improved while carrying costs to governmental expenditures remain moderately weak and liabilities to personal income remain midrange. The long-term liability composite metric in 2023 is at the 49th percentile, roughly in line with Fitch's local government rating portfolio.
-- Liabilities to personal income: 5.3% Analyst Input (51st percentile) (vs. 5.4% 2023 Actual)
-- Liabilities to governmental revenue: 128.5% Analyst Input (74th percentile) (vs. 130.8% 2023 Actual)
-- Carrying costs to governmental expenditures: 17.4% Analyst Input (32nd percentile) (vs. 18.8% 2023 Actual)
Long-term liability burden metrics were adjusted to reflect the issuance of new debt and amortization of outstanding debt since the publication of the most recent fiscal 2023 audited financial statement.
For the carrying costs as a percentage of governmental expenditures metric, Fitch used OPEB actual determined contributions (ADC) given that the city historically has contributed in excess of the ADC annually.
Fitch Ratings - New York - 11 Sep 2024: Fitch Ratings has downgraded the following Chattanooga, TN ratings to 'AA+' from 'AAA':
-Issuer Default Rating (IDR);
-General obligation (GO) bonds.
The Rating Outlook is Stable. The ratings have been removed from Under Criteria Observation.
The downgrade of the IDR and GO bond rating to 'AA+' from 'AAA' reflects the implementation of Fitch's new "U.S. Public Finance Local Government Rating Criteria." The downgrade is driven by a more explicit incorporation of demographic and economic factors under the new criteria, with the city's population trend assessed as 'weak' and 'midrange' demographic and economic level metrics, which balance a high degree of educational attainment against low MHI relative to the Fitch-rated local government portfolio.
The rating also reflects a population and local economy of sufficient size and diversification, respectively, and the city's moderate long-term liability burden resulting in a composite assessed at 'midrange'.
The 'AA+' ratings are buttressed by the city's 'aaa' financial resilience assessment given an 'ample' degree of budgetary flexibility supported by its broad legal control over ad valorem property taxes and employee wages and benefits in the absence of collective bargaining. The assessment reflects Fitch's expectations that reserves will be maintained above 7.5% of spending and transfers out, compared to the current level of about 40% of spending (and at least 20% of spending over the prior decade).
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--A decline in available general fund reserve levels sustained below 7.5% of spending which would lower Fitch's assessment of financial resilience to below 'aaa';
--An approximate 10% increase in long-term liabilities associated with debt, net pension liabilities and/or fixed carrying costs, assuming current levels of personal income, governmental resources and spending.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--A sustained, approximate 60% decrease in long-term liabilities associated with debt, net pension liabilities and/or fixed carrying costs, assuming current levels of personal income, governmental resources and spending;
--A sustained improvement in the city's demographic and economic strength metrics.
SECURITY
The GO bonds carry the city's full faith and credit pledge and are payable from an unlimited ad valorem tax levied on all taxable property within the city.
FITCH’S LOCAL GOVERNMENT RATING MODEL
The Local Government Rating Model generates Model Implied Ratings, which communicate the issuer's credit quality relative to Fitch's local government rating portfolio. (The Model Implied Rating will be the Issuer Default Rating except in certain circumstances explained in the applicable criteria.) The Model Implied Rating is expressed via a numerical value calibrated to Fitch's long-term rating scale that ranges from 10.0 or higher (AAA), 9.0 (AA+), 8.0 (AA), and so forth down to 1.0 (BBB- and below).
Model Implied Ratings reflect the combination of issuer-specific metrics and assessments to generate a Metric Profile and a structured framework to account for Additional Analytical Factors not captured in the Metric Profile that can either mitigate or exacerbate credit risks. Additional Analytical Factors are reflected in notching from the Metric Profile and are capped at +/-3 notches.
RATINGS HEADROOM & POSITIONING
Chattanooga Model Implied Rating: 'AA+' (Numerical Value: 9.08)
-- Metric Profile: 'AA+' (Numerical Value: 9.08)
-- Net Additional Analytical Factor Notching: 0.0
Chattanooga's Model Implied Rating is 'AA+'. The associated numerical value of 9.08 is at the lower end of the 9.0 to 10.0 range for its current 'AA+' rating.
KEY RATING DRIVERS
FINANCIAL PROFILE
Financial Resilience - 'aaa'
Chattanooga's financial resilience is driven by the combination of its 'High' revenue control assessment and 'High' expenditure control assessment, culminating in an 'Ample' budgetary flexibility assessment.
-- Revenue control assessment: High
-- Expenditure control assessment: High
-- Budgetary flexibility assessment: Ample
-- Minimum fund balance for current financial resilience assessment: >=7.5%
-- Current year fund balance to expenditure ratio: 39.5% (2023)
-- Five-year low fund balance to expenditure ratio: 28.5% (2023)
Revenue Volatility - 'Strongest'
Chattanooga's weakest historic three-year revenue performance is neutral to the Model Implied Rating.
The revenue volatility metric is an estimate of potential revenue volatility based on the issuer's historical experience relative to the median for the Fitch-rated local government portfolio. The metric helps to differentiate issuers by the scale of revenue loss that would have to be addressed through revenue raising, cost controls or utilization of reserves through economic cycles.
-- Lowest three-year revenue performance (based on revenue dating back to 2005): 5.3% increase for the three-year period ending fiscal 2010
-- Median issuer decline: -4.5% (2023)
DEMOGRAPHIC AND ECONOMIC STRENGTH
Population Trend - 'Weak'
Based on the median of 10-year annual percentage change in population, Chattanooga's population trend is assessed as 'Weak'.
Population trend: 0.7% Analyst Input (39th percentile) (vs. 0.7% 2022 median of 10-year annual percentage change in population)
Unemployment, Educational Attainment and MHI Level - 'Midrange'
The overall strength of Chattanooga's demographic and economic level indicators (unemployment rate, educational attainment and median household income [MHI]) in 2023 are assessed as 'Midrange' on a composite basis, performing at the 43rd percentile of Fitch's local government rating portfolio. This is due to high education attainment levels offsetting low median-issuer indexed adjusted MHI and midrange unemployment rate.
-- Unemployment rate as a percentage of national rate: 100.0% 2023 (46th percentile), relative to the national rate of 3.6%
-- Percent of population with a bachelor's degree or higher: 34.1% (2022) (61st percentile)
-- MHI as a percent of the portfolio median: 81.9% (2022) (22nd percentile)
Economic Concentration and Population Size - 'Strongest'
Chattanooga's population in 2022 was of sufficient size and the economy was sufficiently diversified to qualify for Fitch's highest overall size/diversification category.
The composite metric acts asymmetrically, with most issuers (above the 15th percentile for each metric) sufficiently diversified to minimize risks associated with small population and economic concentration. Downward effects of the metric on the Metric Profile are most pronounced for the least economically diverse issuers (in the 5th percentile for the metric or lower). The economic concentration percentage shown below is defined as the sum of the absolute deviation of the percentage of personal income by major economic sectors relative to the U.S. distribution.
-- Population size: 187,030 Analyst Input (above the 15th percentile) (vs. 184,038 2022 Actual)
-- Economic concentration: 19.0% (2023) (above the 15th percentile)
LONG-TERM LIABILITY BURDEN
Long-Term Liability Burden - 'Midrange'
Chattanooga's liabilities to governmental revenue have improved while carrying costs to governmental expenditures remain moderately weak and liabilities to personal income remain midrange. The long-term liability composite metric in 2023 is at the 49th percentile, roughly in line with Fitch's local government rating portfolio.
-- Liabilities to personal income: 5.3% Analyst Input (51st percentile) (vs. 5.4% 2023 Actual)
-- Liabilities to governmental revenue: 128.5% Analyst Input (74th percentile) (vs. 130.8% 2023 Actual)
-- Carrying costs to governmental expenditures: 17.4% Analyst Input (32nd percentile) (vs. 18.8% 2023 Actual)
Long-term liability burden metrics were adjusted to reflect the issuance of new debt and amortization of outstanding debt since the publication of the most recent fiscal 2023 audited financial statement.
For the carrying costs as a percentage of governmental expenditures metric, Fitch used OPEB actual determined contributions (ADC) given that the city historically has contributed in excess of the ADC annually.
PROFILE
Chattanooga is located in southeastern Tennessee in Hamilton County (AAA/Stable) and serves as the regional economic center of a six-county metropolitan statistical area of over 500,000 people. The city is a regional hub with notable healthcare and manufacturing components and good access to multi-modal transportation. Sizable manufacturing and distribution companies include Volkswagen and Amazon. The auto industry has been a major driver of economic activity since Volkswagen's facility opened in 2011. This has spurred investment by automotive suppliers and associated industries in the area.
In 2019, Volkswagen named the city as its North American electric vehicle manufacturing base, resulting in an $800 million expansion of its existing Chattanooga facility and the opening of Volkswagen's Battery Engineering Lab in 2022. The economy also benefits from a growing high-technology presence and an innovation district in the city's downtown.
The city's Riverwalk district, outdoor activities and historical sites have augmented Chattanooga's attractiveness as a tourist destination. Residential and commercial building permits experienced significant upticks in both the number and value of buildings in recent years spurred in part by development activity in the downtown area.
In October 2023, the city approved the use of tax increment financing for a major redevelopment project called the Bend Development, a mixed-use private development with retail, apartments, town homes, offices and restaurants. The city expects that the project will yield up to $4 billion of capital investment over the next several years.
In addition, in July 2024, the city held a ground-breaking ceremony for a new multiuse stadium that will serve as the home of the city's Major League Baseball Double-AA club, the Chattanooga Lookouts (an affiliate of the Cincinnati Reds). The $115 million stadium is expected to anchor an additional $1.1 billion of private mixed-use development on another former industrial site near the Tennessee River.