NEW YORK--()--Fitch Ratings takes the following action on the Metropolitan Government of Nashville and Davidson County, Tennessee (Metro) as part of its continuous surveillance effort:
--approximately $1.6 billion general obligation (GO) bonds, rated 'AA', placed on Rating Watch Negative;
--approximately $71 million district energy system bonds rated 'AA-', placed on Rating Watch Negative.
--The Negative Rating Watch reflects the potential additional fiscal strains of a planned $638 million debt-financed convention center upon an already pressured general fund beset by slim reserve levels, significant long-term liabilities and constrained revenue-raising ability.
--Long-term financial pressures include a voter-approved charter amendment that limits Metro's ability to increase its millage as well as sizable pension and OPEB liabilities in comparison to its operating profile.
--Metro's diverse, stable, economic base, anchored by health care, professional and business services, and tourism, has solidified its position as a vital regional center.
--Debt levels, including the upcoming convention center financing, are above average, while amortization is below average.
WHAT COULD TRIGGER A DOWNGRADE?
--Issuance of convention center debt secured by a back-up pledge of non-tax general fund revenues could result in a minor downward adjustment to the rating, assuming the constancy of other credit factors.
The GO bonds are payable from Metro's full faith, credit, and taxing power. Metro has committed a debt service reserve deficiency make-up subject to appropriation as security for the district energy system bonds.
Metro has operated in recent years within a narrow range of reserves that hovers around its policy of maintaining reserves in each major fund of at least 5% of the subsequent year's budget. The policy provides for reserves that are below levels typical for an 'AA' category credit, which in part had contributed to the previously assigned Negative Rating Outlook. Sizable unfunded pension and OPEB liabilities relative to the operating profile, ongoing although currently declining support of the hospital authority, and a voter approved albeit potentially unconstitutional tax rate cap limit the government's flexibility. While Fitch believes that the convention center may enhance economic activity in Nashville's downtown, even the moderate amounts of general fund support that appear possible for debt service and operations would contribute to increased strain on the government's finances to a point where the rating is no longer consistent with the current rating category.
As a consolidated city and county government, Metro benefits from the combination of resources from urban and suburban areas. Nashville has a broad spectrum of economic sectors, including finance, health care, entertainment and tourism, retail, manufacturing, services and agriculture. Metro's credit profile is enhanced by the stability of its substantial government and education employment. Fitch believes Metro's attractiveness as a tourist destination will enhance the prospects of a planned downtown convention center; arguably, the convention center will not suffer from a proposed $400 million expansion of the Gaylord Opryland Hotel and Convention Center due to distinct targeted attendees and locations. A proposed $250 million Medical Trade Center will likely additionally benefit from the breadth of the area's substantial health care sector. Nearly all wealth indicators outperform the state's and the nation's. The October 2009 unemployment rate of 8.9% for Davidson County remains below Tennessee's and the nation's, although the growth in the unemployment rate over the past year has slightly outpaced that of the state and the country.
The fiscal 2009 unreserved general fund balance rose to 6.1% of the $778 million of spending, including transfers out, from the 4.1% of the previous year, as increased property tax collections and departmental expenditure reductions compensated for sales tax and construction related revenue shortfalls. However, Metro offset declining sales tax collections in the general purpose school fund (GPSF) through a $25.2 million draw-down on unreserved fund balance, resulting in a year-end unreserved balance of 4.4% of the budgeted fiscal 2010 $621 million of expenditures, slightly below the policy level of 5%. Metro has stemmed the trend of increasing hospital authority funding through 5% reductions in both fiscal 2009 and fiscal 2010. The fiscal 2010 budget included $41.7 million of support and a $32 million Metro general fund write-off of hospital receivables. Officials project augmenting fiscal 2010 general fund reserves by $6 million and did not budget a drawdown of GPSF fund balance.
Debt levels will remain above-average subsequent to the upcoming financing. Overall debt is projected to equal about $4,500 on a per capita basis and 4.6% of market value. Amortization will slow to a below-average 40.7%. Significant long-term liability exposure compared to the operating budget includes unfunded pension liabilities as well as a $175 million annual required OPEB contribution. Metro has firm plans to review OPEB benefit and funding options in fiscal 2011. Fitch believes that Metro has been somewhat less proactive than other large governments with large unfunded OPEB obligations in developing plans to address them.
Applicable criteria available on Fitch's website at www.fitchratings.com:
'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.
'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at www.fitchratings.com.