News Column

Fitch Rates Chattanooga, TN's GOs 'AA+'; Outlook Stable

June 17, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following Chattanooga, Tennessee's (the city) bonds:

--$26 million GO refunding bonds, series 2014A.

The bonds are scheduled to price on a negotiated basis on June 24. Bond proceeds will be used to refund certain outstanding GO bonds for interest savings.

Fitch also affirms the following ratings:

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

--$97.4 million outstanding industrial development board (IDB) lease rental revenue bonds at 'AA'.

The Rating Outlook is Stable.

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 . 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: Historically conservative budgeting and a willingness to raise revenues have enabled the city to maintain sound reserves and financial cushion.

MIXED EMPLOYMENT PICTURE: 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. Labor force and employment totals have trended downward in recent months, however.

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 COVENANT TO BUDGET AND APPROPRIATE: 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 earmarked for debt service prove insufficient.

RATING SENSITIVITIES

The rating is 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', Stable Outlook by Fitch) and serves as the regional economic center of a six-county metropolitan statistical area. The city's 2013 estimated population of 173,366 reflects 3.4% growth 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 diversify 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 high end manufacturing. The region is the first nationwide to offer low cost internet service at gigabit speed to all residences and businesses.

City unemployment at 6.3% in April 2014 is down from 8.3% a year ago but remains above regional and national levels. The year over year improvement in the city's unemployment rate is due to contraction of the labor force. Wealth levels are generally below the state and national averages, although the city's low cost of living (90.6% of the national average in 2012) somewhat compensates for the below average wealth 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 2013 with a $6.8 million surplus, equal to nearly 3% of spending. Both revenues and expenditures outperformed budget. Total revenues grew 3.0%, driven by sales and other local tax recoveries and offsetting relatively flat property taxes. Fiscal 2013 is the third consecutive year of sizable operating surpluses, boosting unrestricted reserves to $59.4 million, a sizable 24.8% of spending.

Fiscal 2014 operations are again tracking favorably to budget. The city estimates closing the year with a $3.8 million operating surplus, whereas the original budget appropriated $2 million of reserves for non-recurring expenditures. Revenues are projected to be $3 million over budget, largely due to favorable property tax collections. On the expenditure side, $2.9 million of savings is expected due to conservatively budgeting for no staffing vacancies.

The proposed fiscal 2015 budget represents a small 1% increase over the fiscal 2014 budget. The city indicates operations will be balanced, but anticipates appropriating about $10 million in reserves for paygo financing of capital projects. Reserves will remain sizable; in fiscal years 2011 through 2013 the city added $30 million to general fund balance.

MODERATE DEBT BURDEN

Overall debt levels are moderate at $2,596 per capita and 2.9% of market value. Amortization is slightly above average with 58% of principal maturing within 10 years. Fitch notes positively that the city maintains dedicated tax revenue sources to meet debt service payments on debt issued for economic development projects.

The city's fiscal 2015 - fiscal 2019 capital improvement plan includes general government projects of $216 million and an additional $186 million for enterprise needs. Tax-supported debt issuance of approximately $25 million is planned for fiscal 2016 to finance two years of capital improvements.

NOTABLE PENSION REFORMS IMPLEMENTED

Pension contributions escalated from $11.7 million to $19.7 million from fiscal 2010 to 2013. The city administers two single-employer defined benefit plans, one for general employees and the other for police officers and firefighters. Stagnant plan assets and escalating actuarial liabilities led to erosion of the funded ratio of the fire and police pension fund to 63% as of January 2013. In February 2014 the city ratified reforms to the police and firefighter's plan, reducing the net liability by nearly $86 million with a resultant funded ratio of 70.9%. The outcome of challenges to the constitutionality of the reforms is pending.

The city is fully funding its OPEB ARC, a $12.9 million payment in fiscal 2013. The OPEB UAAL is $127 million, which is a moderate .8% of the fiscal 2013 real property market value. The funded ratio of the OPEB trust is 13.5%. Total fiscal 2013 carrying costs (debt service, pension requirements and OPEB spending) equaled 20.7% of total governmental spending. Fitch considers this a moderate burden and believes that the city's conservative financial management will enable it to assume successfully the increased pension burden.

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.

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

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835045

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Patricia McGuigan

Director

+1-212-908-0675

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Brendan Scher

Analyst

+1-212-908-0686

or

Committee Chairperson

Steve Murray

Senior Director

+1-512-215-3729

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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