Fitch Rates Hamilton County, TN’s GOs ‘AAA’; Outlook Stable
By Business Wire News
01 April 2015
Fitch Ratings has assigned an ‘AAA’ rating to the following general obligation (GO) bonds of Hamilton County, Tennessee (the county):
–$65 million GO bonds, series 2015A;
–$55 million GO refunding bonds, series 2015B.
The bonds are expected to sell competitively on April 14, 2015. The series 2015A bonds will pay the principal of certain outstanding revolving credit bond anticipation notes (BANs) and fund school and other governmental projects. The series 2015B bonds will refund certain outstanding GO bonds.
In addition, Fitch affirms the following rating:
–$238 million outstanding GO bonds at ‘AAA’.
The Rating Outlook is Stable.
The full faith, credit, and unlimited taxing power of the county are irrevocably pledged.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: Consistently high reserves are supported by adherence to conservative policies. Revenue-raising capacity and manageable cost pressures contribute to ample financial flexibility.
DIVERSE LABOR MARKET: The county’s diverse economy benefits from the increasing presence of healthcare, insurance, and higher education, which supplement the traditional manufacturing and transportation sectors. Recent increases to the employment base coupled with the availability of gigabit-speed Internet service enhance the county’s long-term economic prospects.
SOUND SOCIOECONOMIC INDICATORS: The county exhibits favorable socioeconomic characteristics, including wealth levels that are favorable to the state, and moderate unemployment rates.
LOW DEBT BURDEN: Rapid debt amortization along with projected population and tax base growth should allow the county to maintain low debt levels as it implements its manageable borrowing plans.
The rating is sensitive to shifts in fundamental credit characteristics, including the county’s strong financial management. The Stable Outlook reflects Fitch’s expectation that such shifts are unlikely.
Hamilton County is located in the southeast region of Tennessee with the city of Chattanooga as its largest city. It is approximately 120 miles southwest of Knoxville and 360 miles east of Memphis.
DIVERSE LABOR MARKET
The county is home to Chattanooga (GO bonds rated ‘AA+’, Outlook Stable by Fitch), the regional economic center of a six-county metropolitan statistical area. Healthcare, insurance, higher education, retail, and transportation companies, as well as a growing energy presence stabilize the county’s economy. The county’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 concerns about this concentration is the increase in high-end and high-skilled manufacturing.
A recent positive announcement is a major expansion by one of the county’s largest taxpayers. Volkswagen (VW; long-term Issuer Default Rating of ‘A’, Outlook Stable) is investing $900 million to its automotive production plant to add a new product line. Production of the new mid-sized SUVs is expected in late 2016 and the new plant is estimated to add 2,000 jobs. VW is located in a 3,000 acre industrial park as well as several ancillary businesses. Additional automotive suppliers are expected to open in the county as a result of the expansion.
Amazon.com, Inc. has a fulfillment center located within the county with full-time employment of 1,966. Fitch anticipates that recent commercial development will continue to diversify the county’s economic profile over the next few years. The region is the first nationwide to offer Internet service at gigabit speed to all residences and businesses. The high speed internet service helped spark establishment of an innovation district in the urban core to foster business creation and innovation.
SOUND SOCIOECONOMIC PROFILE
Economic metrics have remained stable. The tax base has been generally stable in recent years, with the latest four-year cyclical reappraisal completed in fiscal 2014. The property tax rate has been constant for six years. The November 2014 unemployment rate of 6.4% is the same as the state and moderately above the national (5.5%) rate. Wealth levels hover slightly above state averages but below national averages.
STRONG FINANCIAL PROFILE
The county’s sound financial management practices notably include the maintenance of operating reserves well above its conservative policy (unassigned general fund balance of at least 25% of budgeted expenditures). With commission approval, the county may raise its largest revenue source, property taxes, by increasing the tax rate periodically. In addition, the county has implemented expenditure reductions to address revenue fluctuations. Fitch notes that reductions to date have been modest, providing the flexibility to make further cuts if necessary.
In fiscal 2013, the county realized its sixth consecutive operating surplus, which increased the unrestricted general fund balance to a very strong 51.5% of total spending, well above its 25% reserve policy. The fiscal 2014 final general fund budget appropriated $5.8 million of reserves to balance operations; but again through favorable budgetary control actual reserve use was a minimal $1.4 million. General fund spending included $5 million for capital outlay and a $5 million increase in transfers to the debt service fund. At year end, the unrestricted general fund balance was a strong 47.9% of spending.
The adopted fiscal 2015 general fund budget of $199.9 million is a 1% increase over the prior year budget; and was balanced without the use of reserves. The general fund budget includes an across the board pay raise of 2.5% (there were no raises in fiscal 2014) and full time budgeted positions declines modestly. There is no increase in the real property tax rate although 2% growth is budgeted for taxbase growth.
Subsequent to budget adoption the county agreed to fund capital expenditures to the enterprise south industrial park related to the VW expansion, the net budgetary impact is for the use of $15 million to $16 million in general fund reserves in fiscal 2015. Given the county’s exceptionally strong balance sheet position, the county’s financial position is expected to remain strong and well in excess of the county general fund balance policy.
Further appropriation of $6.25 million of reserves for the VW expansion is planned for fiscal 2016, which will still leave strong reserves. The county retains ample financial flexibility as the real property tax rate can be increased and the current local option sales tax rate of 2.25% is under the state authorized maximum, of 2.75%. The county has actively pursued cost containment effort to stem the trajectory of employee health insurance costs, adopted a new hybrid pension program to control pension costs for new hires and when needed has cut staffing levels.
LOW DEBT BURDEN
The county’s positive debt profile is underpinned by sound debt management practices. The county’s conservative policy of retiring GO debt within 15 years with level principal repayment results in a rapid amortization rate of 74% in 10 years. Despite the rapid amortization, debt service claimed a manageable 14% of fiscal 2014 general government expenditures. Overall debt ratios of 2.1% of market value and $1,706 on a per capita basis remain low and the county will further benefit from probable tax base growth.
The fiscal 2016 through 2020 capital improvement plan (CIP) totals a manageable $168 million, including $104 million for education needs. The county maintains a $90 million bank line of credit which is used for interim capital financing pending long term take out. The next planned long-term debt issuance is $63 million in Spring of 2017.
MANAGEABLE RETIREE COSTS
Other long-term liabilities should not pressure the credit profile. The county makes 100% of its annual required contribution (ARC) for pensions equal to 5.6% of general government expenses, inclusive of the sheriff fund. Benefits are primarily provided through the state managed political subdivision pension plan, a well-funded plan. Employees hired on or after Oct. 1, 2015 will participate in a hybrid pension plan which fixes the county’s contribution to 9% a year (the current plan is now 14%) regardless of plan performance.
The county paid other post-employment benefits (OPEB) of $1.4 million in fiscal 2014 and additionally contributed $1.6 million (combined 4.1% of expenses) to a trust with a balance of $11 million. An additional $1.6 million trust contribution was budgeted for fiscal 2015. The unfunded OPEB plan is 32% funded and the unfunded liability is a modest $23 million.
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:
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
Elizabeth Fogerty, +1 212-908-0526