Fitch Affirms Johnson City, TN's GO Rating at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed its 'AA' rating on the following outstanding general obligation (GO) bonds of the city of Johnson City, Tennessee (the city):

--$89.3 million outstanding GO bonds.

In addition, Fitch affirms the following ratings:

Johnson City Public Building Authority

--$8.7 million public facilities refunding bonds at 'AA';

--$2.1 million public facilities refunding bonds (taxable) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The city's GO bonds are general obligations of the city backed by its full faith and credit and unlimited taxing power.

The Johnson City Public Building Authority bonds are secured by the full faith and credit and unlimited taxing power of the city under a loan agreement with the authority.

KEY RATING DRIVERS

SOUND AND STABLE FINANCIAL PERFORMANCE: Conservative financial management practices have resulted in the maintenance of healthy reserves. Revenue trends have been largely positive, keeping pace with expenditures.

AVERAGE, STABLE ECONOMIC PROFILE: City wealth levels are below state and national averages, though unemployment rates continue to be characteristically low. While employment is growing in healthcare and education sectors, job losses in traditional manufacturing operations have outstripped these gains.

MODERATE OVERALL DEBT LEVELS: Overall debt levels remain moderate and amortization is above-average. Pension costs consume a relatively low percentage of spending, and Fitch favorably notes the city's efforts to reduce these liabilities in recent years.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and history of economic stability.

CREDIT PROFILE

Johnson City is located principally in Washington County in northeastern Tennessee near Kingsport and Bristol, known collectively as the tri-cities area. The city has a population of 63,930 with above-average population growth in recent years supported by economic developments in healthcare and education.

STABLE LOCAL ECONOMY

Population and wealth levels have been steadily increasing, though per capita income remains somewhat below the national average. Unemployment declined to 6% in December 2013, below the state and national averages, but this improvement is due to labor force declines exceeding employment losses. The city's education and health services industries anchor the local economy and are experiencing job gains. However, the gains have been insufficient to offset declines in other parts of the employment base.

Mountain States Health Alliance (MSHA), a regional medical system with some 9,000 employees and affiliates and with facilities in both Tennessee and Virginia, is based in the city and ranks as its largest employer, with 3,500 employees. The city's second largest employer, East Tennessee State University, employs some 2,300 people and serves a total enrollment of approximately 15,000 including medical and pharmaceutical students. Despite slight enrollment declines, the university projects continued growth in future years, and has partnered with the city in the planned construction of a $30 million performing arts center.

The city's largest taxpayer, the Glimcher Mall at Johnson City, is considering an expansion to attract high-end retailers to the region. The city is expecting the new addition to strengthen sales tax performance and bolster the city's standing within the northeastern Tennessee region as a center for designer goods.

STRONG FINANCIAL FLEXIBILITY

The city continues to exhibit structural balance and to maintain strong reserve levels. Revenues have largely kept pace with expenditures; the use of reserves to fund capital projects has resulted in some minor fluctuation of balances but levels remain strong.

At fiscal end 2013, unrestricted general fund balance plus rainy day reserves equaled $20.5 million or a solid 27% of spending. The city has historically maintained reserves in excess of its policy level of 16%. Revenues were slightly below expectations, mostly due to a softening of sales tax revenues compared to fiscal 2012. Expenditures came in lower than budget due to savings in all departments. The budget included the use of $2.5 million in fund balance to accommodate $2.2 million in capital projects, though the city only used about $378,000 in fund balance.

Ample financial flexibility remains as the result of sustained tax base growth and the implementation of modest expenditure cuts. The city's tax rate has not been increased in over 10 years, remaining the lowest among cities in the tri-cities region. Fitch views positively the city's preserved revenue raising flexibility as a buffer to offset future spending increases.

The 2014 budget, at $78.3 million is essentially unchanged from the fiscal 2013 budget. The city budget continues to be conservative, and includes $2.2 million of fund balance solely earmarked for capital improvements and the establishment of an economic development fund. Fitch expects reserve levels to be maintained at or close to current levels due to the history of conservative budget practices.

MODERATE DEBT; MANAGEABLE FUTURE NEEDS

The city's overall net debt ratios are moderate at $3,351 per capita, or 3.7% of market value. Amortization is above average at 60.5% within 10 years. Debt service as a percentage of spending is affordable at 9.7% in fiscal 2013. As of fiscal 2013, variable rate debt represented 17.4% of overall general obligation debt, which Fitch considers moderate for city with this credit profile.

Future capital needs are manageable. The city's fiscal 2015-2019 capital improvement plan totals $154 million, representing a 29% decrease from that of fiscal 2012-2016 due to careful capital planning management. The city does not expect any new borrowings during the next two years unless new revenues are available from tax base appreciation or approved tax rate increases to support debt service costs. Management continues to fund capital needs through annual budgets.

PENSION AND OPEB COSTS ARE MANAGEABLE

Fitch views positively the city's efforts to limit its other long-term liabilities. The city withdrew in fiscal 2011 from the Tennessee Consolidated Retirement System (TCRS), a multi-employer defined benefit plan run by the state and switched to a defined contribution plan. As a result, long term liabilities are expected to decline. In fiscal 2013, the city contributed $7 million to TCRS, equal to a low 6.7% of total governmental spending. City OPEB benefits costs are very modest with the city contributing 67% of the $1.4 million ARC in fiscal 2013. Total city carrying costs (the sum of debt service, pension ARC, and OPEB contributions) equaled a moderate 17.1% of governmental spending in fiscal 2013. Fitch does not expect carrying costs to pressure city finances going forward.

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.

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=827419

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Contacts

Fitch Ratings
Primary Analyst
George M. Stimola, +1 212-908-0770
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Kevin Dolan, +1 212-908-0538
Director
or
Committee Chairperson
Karen Ribble, +1 512-215-3725
Senior Director
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
or
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
George M. Stimola, +1 212-908-0770
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Kevin Dolan, +1 212-908-0538
Director
or
Committee Chairperson
Karen Ribble, +1 512-215-3725
Senior Director
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
or
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com