Fitch Rates Chattanooga, TN's GOs 'AA+'; Outlook Stable
--$37 million GO bonds series 2015A;
--$19 million GO refunding bonds series 2015B.
The bonds are scheduled to sell via public bid on October 20th. Refunding bond proceeds will be used to refund series 2009 and 2010A GO bonds for interest savings. The series 2015A proceeds will fund various capital projects.
Fitch has also affirmed the following ratings:
--$201.7 million outstanding GO bonds at 'AA+;
--$105.6 million outstanding industrial development board (IDB) lease rental revenue bonds at 'AA' issued by the Chattanooga Industrial Development Board.
The Rating Outlook is Stable.
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. The IDB bonds are funded 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
FAVORABLE ECONOMIC GROWTH: Strong employment and population growth, increased construction and a resurgence of the downtown contribute to an expanding economic base. The diverse economy benefits from health care, higher education, manufacturing and transportation sectors.
SOUND FINANCIAL MANAGEMENT: Historically conservative budgeting, expenditure flexibility and a willingness to raise revenues have enabled the city to maintain sound reserves.
MODERATE DEBT BURDEN: Debt levels should remain moderate given limited borrowing needs and prospects for tax base growth. Other long-term liabilities are low relative the size of the market value of real property.
LEASE RENTAL APPROPRIATION: The 'AA' rating on the lease rental bonds reflects the city's inherent credit characteristics and agreement to budget and appropriate sufficient funds for debt service, should other city revenues earmarked for debt service prove insufficient. The lease obligation remains in force until the bonds are fully funded.
ECONOMIC DIVERSIFICATION; FINANCIAL STABILITY: Continued economic expansion and diversification, with ongoing financial stability, would be credit positives.
Chattanooga is located in southeastern Tennessee in Hamilton County (GO bonds rated 'AAA', Stable Outlook by Fitch) and serves as the regional economic center of a six-county metropolitan statistical area. The city's 2014 estimated population of 173,366 reflecting growth in excess of the national rate.
DIVERSE, GROWING ECONOMY
Health care, insurance, higher education, retail, and transportation companies diversify the city's economy. The city's Riverwalk area, available outdoor activities, and historical sites have augmented its attractiveness as a tourist destination. Manufacturing remains above the state and national averages but growth in other sectors far outpaces manufacturing expansion. The region is the first nationwide to offer low cost internet service at gigabit speed to all residences and businesses, contributing to entrepreneurial companies clustered in the downtown.
Employment growth has accelerated, far outpacing the national employment growth rate. The unemployment rate dropped to 6.7% as of June 2015 despite strong growth in the labor force, fueled by the growing population. The city's unemployment rate compares favorably to the state rate of 7.1%, but is above the national rate of 5.5% Wealth levels are generally below the state and national averages, although the city's cost of living (90.1% of the national average in 2013, per citydata.com) somewhat compensates. Recent wage data shows promising gains for the city.
Continued strong employment growth is expected given large expansion announcements and sizable building permit activity. Among the top ten employers is Volkswagon (VW), with almost 2,400 employees at the 2011 Passat assembly plant. A new SUV production line is expected to employ an additional 2,000 employees, beginning in 2016. The recent news regarding VW's emissions testing has reportedly not affected their expansion plans. While non-school real property taxes are waived until 2039, the expansion is expected to generate significant sales tax revenues The City's incentive commitment to VW totals $26 million over two fiscal years. Gestamp, an automotive-related manufacturer, also announced a major expansion with 500 new jobs expected.
Residential and commercial building permits experienced a significant fiscal 2015 uptick in both number and value of buildings, with the downtown areas experiencing strong activity. The $100 million mixed use Cameron Harbor project on the Riverwalk is well underway as well as a number of other projects. Assessed value increased a cumulative 21% over the past six years, and continued growth is expected. Zillow indicates housing values are almost at the prerecession peak. The mortgage delinquency rate as of Aug. 31, 2015 is a low 3.4% (in contrast to the national rate of 6%). Market value of real property per capita has risen steadily.
STRONG FINANCIAL PROFILE
Healthy reserve levels, conservative budgeting, and steady growth in local revenues underscore the city's financially sound position. Fiscal 2014 general fund operations concluded with an $8.6 million operating surplus, equal to 3.7% of spending. Both revenues and expenditures outperformed budget, as the city budgets conservatively. Fiscal 2014 is the fourth consecutive year of sizable operating surpluses, boosting unrestricted reserves to almost $70 million, a sizable 31% of spending.
Fiscal 2015 operations are again tracking favorably to budget on both revenues and expenditures, before transfers. The year is expected to close with a moderate use of fund balance ($8 million), as spending includes a substantial amount of non-recurring expenditures, namely $31 million for capital expenditures and the VW incentive contribution.
The proposed fiscal 2016 budget includes an appropriation of $6.25 million in reserves for the second incentive payment to VW. Given the city's conservative budgeting practices, actual reserve use is likely to be minimal and reserves are expected to remain sizable.
MODERATE DEBT BURDEN
Overall debt levels are moderate at $2,827 per capita and 3.1% of market value. Amortization is slightly above average with 58% of principal maturing within 10 years. The city maintains dedicated tax revenue sources to meet debt service payments on debt issued for economic development projects.
The city's fiscal 2016 - fiscal 2020 capital improvement plan includes general government projects of $163 million and an additional $168 million for enterprise needs. The current offering funds two years of projects, through fiscal 2016. The next anticipated tax-supported debt issuance in 2017 or 2018 for approximately $29 million will finance the next two years of capital improvements and will have a modest impact on the debt burden.
LOW LONG-TERM EMPLOYEE BENEFIT LIABILITIES
The city administers two single-employer defined benefit plans, one for general employees and the other for police officers and firefighters. The unfunded accrued liability of both plans, Fitch-adjusted for a 7% investment rate of return, was $156 million, or a low 1.1% of the market value of real property. In February 2014 the city ratified reforms to the police and firefighter's plan, contributing to a reduction in the Fitch adjusted pension liability of nearly $86 million in 2014 relative to 2013. The outcome of challenges to the constitutionality of the reforms is pending.
OPEB liabilities are moderate and well managed. The city conservatively over-funded its fiscal 2014 OPEB ARC. The January 1, 2014 OPEB UAAL is $131 million, which is a moderate .8% of the fiscal 2015 real property market value. An OPEB trust, with $36 million in fiscal 2014 assets, has a funded ratio of 20%. Total fiscal 2014 carrying costs (debt service, general government pension requirements and OPEB spending) equaled a sizable 20.9% of total governmental spending.
LEASE RENTAL BOND COVENANT TO BUDGET AND APPROPRIATE
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, and 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 a quarter cent sales tax, state contributions 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.
Since fiscal 2001, pledged revenue coverage of annual debt service has ranged from 1.2x to 1.8x, with coverage equal 1.4x in each of the past three fiscal years. While Fitch notes the sufficiency of pledged revenues, it is not a factor in the rating.