Fitch Rates Shelby County, TN's $253.555MM GOs 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following Shelby County, Tennessee (the county) general obligation (GO) bonds:

--$238.415 million GO refunding bonds, 2012 series A;

--$15.140 million special GO school refunding bonds, 2012 series B.

The bonds are expected to be sold via negotiation the week of Feb. 6. The 2012A bonds will refund all or a portion of certain series of outstanding GO bonds of the county and used to pay a portion of the costs of certain swap termination fees in conjunction with the termination of certain interest rate swaps related to the GO bonds being refunded. The 2012B bonds will refund all or a portion of the special GO school bonds, 2003 series A.

In addition, Fitch affirms the following ratings:

--$1.496 billion GO bonds.

The Rating Outlook is stable.

SECURITY

The series A bonds are general obligations secured by the full faith and credit and the taxing power of the county. The series B bonds are secured by a pledge of the county's unlimited taxing power on all taxable property excluding the city of Memphis.

KEY RATING DRIVERS

PRUDENT FISCAL MANAGEMENT: Consistently positive operating margins coupled with conservative financial policies and strong financial management has yielded healthy reserve levels.

REGIONAL ECONOMIC ANCHOR: Shelby County, which includes the city of Memphis, serves as the center for transportation, trade, tourism, and health and education for a sizable multi-state region.

WEAK DEMOGRAPHIC METRICS: Despite its prominent role in the regional economy, the county continues to exhibit high unemployment and poverty, average wealth, low educational attainment, and slow population growth.

HIGH DEBT POSITION: Shelby County's debt position embodies moderately high overall debt levels and reduced but still significant variable-rate exposure.

WHAT COULD TRIGGER A RATING ACTION

In August 2011 the consolidation of Shelby County Schools (SCS) and Memphis City Schools (MCS) was approved effective for the 2013-2014 school year. A transitional committee has been established by the court to resolve operational, logistical, and financial details of the consolidation.

Post-merger, the city of Memphis will not be required to maintain its local maintenance of effort (approximately $68 million currently) and the county will be responsible for providing local funding for all schools. Fitch will monitor what additional financial or debt burden is placed on the county, if any, and the impact on credit quality, as details become available.

CREDIT PROFILE

CONSISTENT FINANCIAL RESULTS, STRONG RESERVES

Strong financial management and a commitment to ample reserves support the county's strong 'AA+' GO rating.

Fiscal 2011 marked the county's eighth consecutive general fund surplus, which brought the unassigned general fund balance to $86.1 million or a generous 23.9% of expenditures, transfers out, and other uses.

In 2009, the county increased its reserve policy, targeting general fund unassigned fund balance to between 15%-25% of annual revenue. The improvement in reserve levels that followed has eliminated the need for cash flow borrowing previously necessitated by the timing of the property tax collection cycle.

The county's financial position is further strengthened by a debt service fund balance of $107.8 million as of fiscal year-end 2011 which the county uses to fund future years' debt service and pay-as-you-go capital. Management expects to reduce the debt service fund balance to approximately 30% of annual debt service (or approximately $55 million) over the near term.

FISCAL 2012 PROJECTIONS

The fiscal 2012 budget represents a modest increase in spending of less than 1% from the prior year. Preliminary projections for fiscal 2012 indicate flat or perhaps modest reserve growth.

Approximately two-thirds of the general fund budget is funded by property taxes. General fund finances have been buoyed by the decision to retain the tax rate subsequent to the fiscal 2010 tax base revaluation, generating approximately $12 million in additional recurring revenue (or 3.3% of total general fund revenue sources). The fiscal 2012 tax rate, at $4.02 per $100 of assessed value (AV) in Memphis, with an additional $0.04 for rural school bonds applied outside the city, is among the highest in the state, which could limit future revenue raising flexibility.

GOOD EMPLOYMENT DIVERSITY

Shelby County is the job center for a three-state, four-county metropolitan statistical area (MSA) encompassing jurisdictions in Arkansas, Mississippi, and Tennessee. The economic base is deep and diverse but mostly recognized for its distribution capabilities which stem from its network of road, train, and Mississippi River port facilities, as well as Memphis International Airport, with its massive air cargo operations and Federal Express headquarters.

The education and health services sector represents 14% of total employment, and continues to serve as a stabilizing force and source of job growth during the economic downturn. Methodist Health Care is the largest employer (8,889) in this sector. Another prominent health care provider, St. Jude Children's Research Hospital, is in the midst of a five-year $1 billion expansion program.

The metro area also has a sizeable tourism base, which has benefited from the development of the gaming industry in nearby Tunica, Mississippi (40 miles southwest of Memphis).

TRANSPORTATION DOMINATED BY FEDEX

Federal Express (not rated by Fitch) is the dominant regional employer, with around 31,000 workers or approximately 5% of the Memphis MSA employment base.

The size of the FedEx workforce has grown modestly since 2008. FedEx, which is headquartered within the county, has made significant capital investments at its airport hub operations, and recently extended its lease at the facility for a 30-year period.

Other large private employers within the transportation sector include UPS (2,200), Pinnacle Airlines (1,350), and Delta (1,400 - employment levels may soften given the airline's plans to reduce scheduled capacity).

HIGH DEBT BURDEN AND VARIABLE-RATE EXPOSURE

The county's overall debt burden, including the debt of the underlying municipalities, is above average at 4.5% of market value, or $3,197 per capita. Fitch expects debt levels will moderate over time with reductions in planned capital borrowing due to slowed population growth and a slight decline in school enrollment.

Debt service costs, which includes general, debt service and education fund operations, represent a high 21% of spending, which is somewhat offset by an above-average rate of debt amortization (at 60% within 10 years, post-refunding).

Variable-rate exposure has softened but remains quite high. Following issuance, the county will have $399 million of variable-rate debt outstanding, representing 25% of total debt (down from 43% in 2010.)

All of the county's variable-rate debt has been synthetically fixed through derivative products. Termination costs associated with the current refunding are estimated at $6.6 million for the 2004B bonds and $25 million for the 2006C which will be paid from a combination of cash on hand ($6 million) and bond proceeds ($25 million).

The post-refunding mark-to-market related to county's derivative position is an estimated $90 million. Risk to collateral posting or counterparty termination is considered minimal by Fitch.

PENSION AND OPEB COSTS ARE MANAGEABLE

The county provides pension benefits to its employees through a single-employer defined benefit plan. As of July 30, 2011 the plan was well funded at 81% according to the Fitch adjusted funded ratio (assuming a 7% IRR), and the unfunded actuarial accrued liability (UAAL) totaled $120 million or a very low 0.2% of market value. The county's 2011 pension contribution, which equals 100% of the actuarial requirement contribution (ARC), is equivalent to an affordable 5.2% of spending.

The county also provides other post-employment benefits (OPEB) to its retirees, and established a trust in 2007 which has a current balance of $30.4 million. The county contributed 82% of the OPEB ARC (equivalent to 7% of spending). The most recent reported UAAL associated with OPEB totaled $261 million or 0.4% of market value.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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