Fitch Rates Shelby County, TN's GO Bonds 'AA+'; Outlook Stable

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

--$190 million general obligation (GO) refunding bonds 2015 series A.

Proceeds will be used to refund series 2005A and variable rate series 2006C bonds and to fund the termination fee for the swap associated with the 2006C bonds. The sale is scheduled for competitive sale in early January.

In addition, Fitch affirms the following ratings:

--$1,276 million county GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations secured by the full faith and credit and the taxing power of the county.

KEY RATING DRIVERS

DIVERSE ECONOMIC BASE: 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. Many economic development projects are underway or in the pipeline, which should help boost the local economic recovery.

WEAK DEMOGRAPHIC METRICS: Despite its prominent role in the regional economy, the county continues to exhibit high unemployment. Poverty and wealth levels compare unfavorably to the nation.

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

DEBT LEVELS MODERATING: Debt ratios have declined to moderate levels as amortization has exceeded debt issuance.

RATING SENSITIVITIES

SCHOOL REALIGNMENT RISK: The public education system has seen dramatic changes from a merger with the city schools and subsequent spin off of six municipal districts. The county's funding contribution is not expected to change over the near term, but if the county school district falters in management of resources there is the potential for budgetary strain for the county.

CREDIT PROFILE

The county, which has the city of Memphis as the county seat, is located in the extreme southwest corner of the state. With a 2013 population of 939,465, the county is the largest in the state.

STRONG BUDGETARY CONTROL

Strong financial operations are underscored by many years of general fund surpluses, ample liquidity and good budgetary control. Recently strengthened reserve fund policies help to ensure sufficient resources are available to meet unforeseen emergencies; unassigned fund balances as a percent of revenues are to be maintained at 20% to 30% for the general fund and 20% to 30% for the debt service fund.

A $2.9 million operating surplus in fiscal 2013 boosts the unrestricted general fund balance to $95.8 million, a strong 25.9% of general fund expenditures. Property taxes are the dominant revenue source, accounting for 65% of general fund revenues. On the expenditure side, costs include a 1% raise for employees as well as fringe benefit cost increases.

For fiscal 2014 the county budgeted balanced operations but achieved an operating surplus of $7.6 million (2% of spending), bringing the unrestricted general fund balance to 27.5% of spending. The operating surplus reflects general budgetary control, but also the unbudgeted receipt of approximately $3.6 million pertaining to disputed PILOTs due to the county. Expenditures did not include a salary increase for employees. Assessments declined as a result of the reappraisal as well as tax base losses from Delta closing its hub. The county adjusted the tax rate to account for the base decline and also raised the millage an additional .06 mills to provide additional funding for education. The taxbase declined each year over the past five years, for a cumulative 9% decline from fiscal 2010 through fiscal 2015.

The fiscal 2015 general fund budget is balanced with no use of reserves. General fund revenues are budgeted to decline by just under 1% due to the non-recurrence of property reappraisal fee collections received in fiscal 2014. Budgeted expenditures also declined by just under 1% due to savings expected to occur from hiring and other restrictions.

EVOLVING SCHOOL ALIGNMENT

The county and city of Memphis school districts merged in fiscal 2014. The loss of $65 million in school funding previously provided by the city of Memphis was partially offset in fiscal 2014 by the closing of five schools, the conversion of seven schools to a state-operated Achievement School District, and over 1,500 layoffs. In fiscal 2014 the county education fund spent $385 million, a $24 million increase over the prior year. The increased county contribution was partially funded by an increase in the millage rate. The schools' fiscal 2014 budget was balanced with $12.6 million of reserves, with actual results increasing the school general fund balance by $21.7 million.

In fiscal 2015 six municipal school districts began educating students that previously attended the county district. The new districts represent approximately 20% of county school average daily membership. Debt service costs associated with transferred school buildings will stay with the county, as will the ability to levy taxes countywide for the debt. The Shelby County Schools' fiscal 2015 budgeted use of general fund balance is $19.4 million. With the merger in 2014, the county's annual education contribution is fixed through 2016. The contribution is distributed among the county and municipal districts based on average daily membership. Excess capacity and erosion of enrollment at the county district is likely to necessitate further cuts and school closings for the county school district.

REGIONAL ECONOMIC IMPORTANCE

Shelby County is the employment 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. The county is home to a 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. Other large private employers within the transportation sector include UPS and Pinnacle Airlines. The extensive distribution center facilities make the area an attractive location for manufacturing facilities and suppliers.

The labor market's contraction could hamper longer-term growth potential. The labor force declined 2.7% in the year ending September 2014, whereas the nation posted .2% growth. At September 2014 the county unemployment rate of 8.4% exceeds the national rate of 5.7%. Cutbacks by FedEx and Delta, which formerly had a hub in the airport, are contributors to unemployment.

Economic development projects underway or in the pipeline include a Bass Pro Shops Outdoor World at the Pyramid which is scheduled to open in May 2015 and employ 600. Electrolux's new manufacturing facility opened early this year and is expected to add an additional 650 workers over the coming years. Redevelopment of the Memphis fairgrounds for major mixed use facilities is pending legislative approvals, and expansions at Elvis Presley Enterprises are underway. The metro area also has a sizable tourism base, which has benefited from the development of the gaming industry in nearby Tunica, Mississippi (40 miles southwest of Memphis).

Strong education and health services sectors, which represent 14.5% of total employment, aid economic stability. Methodist Health Care, the largest employer in this sector, and another prominent healthcare provider, St. Jude Children's Research Hospital, a premier pediatric cancer research hospital, recently completed a sizable expansion program.

DEBT LEVELS NOW MID-RANGE

Management has sought to reduce debt levels and with amortization outpacing new issuance, debt levels are now what Fitch considers moderate. Debt burden is 4.6% and the 10-year amortization rate is rapid at almost 69%. A moderate 23% of the county's direct debt is variable rate with the debt swapped to fixed.

The county's fiscal 2015 to 2019 capital improvement plan identifies $406 million in needs. The largest project category is the schools, with $275 million in project needs. Amortization of existing debt exceeds planned issuance. Funding sources for the five year CIP includes $275 million of general obligation bonds, with the balance paygo and federal funding. The county is planning a $120 million commercial paper issuance in early 2015 to provide two years of interim funding to be subsequently funded with general obligation bonds.

The county provides pension benefits to its employees through a single-employer defined benefit plan. The unfunded actuarial accrued liability (UAAL) at June 30, 2014 totaled $243 million, or a low 0.4% of real property market value. The funded ratio of the plan is 82.6%, Fitch-adjusted with a 7% discount rate to an estimated 74.4%. The county's 2014 pension contribution is a sharp increase from three years ago, although the annual required contribution (ARC) is still an affordable 3.4% of total governmental spending.

The UAAL associated with other post-employment benefits (OPEB) totaled $135 million as of July 1, 2014, a marked decline from the previous year largely due to a plan change with reduced premiums. Additionally, the county overfunded the OPEB arc in fiscal 2014. Total carrying costs ( debt service, pension, and OPEB) account for a moderate 22.1% of governmental spending.

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, Zillow.com, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and the Underwriter.

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=955995

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Contacts

Fitch Ratings
Primary Analyst
Patricia McGuigan
Director
+1 212-908-0675
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Barbara Ruth Rosenberg
Director
+1 212-908-0731
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Patricia McGuigan
Director
+1 212-908-0675
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Barbara Ruth Rosenberg
Director
+1 212-908-0731
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com