NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA+' to the following general obligation (GO) bonds of the city of Atlanta, Georgia (the city):
--$252 million GO public improvement bonds, series 2015.
The bonds will be sold via competitive sale on June 10. Proceeds from the sale of the bonds will finance various acquisitions, improvements, and repairs to public streets and infrastructure and public facilities. The bonds will have a final scheduled maturity date of Dec. 1, 2034.
The Rating Outlook is Stable.
The bonds are a general obligation of the city backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
HEALTHY RESERVE POSITION: General fund unrestricted balances approximate one-quarter of annual spending in fiscal 2014, providing a comfortable cushion against unanticipated budgetary stress. The city has a conservative fund balance policy requiring a minimum of 15% to 20% of the subsequent year's operating expenditures and transfers out.
STRONG BUDGETARY CONTROLS: The exercise of various revenue and expenditure tools in conjunction with the implementation of detailed monthly financial reporting has significantly improved the city's financial position and support Fitch's expectation for operating stability going forward.
MODERATE LONG-TERM LIABILITIES: Long-term liabilities related to debt, pension, and other post-employment benefit (OPEB) liabilities are moderately high relative to market value, while consuming a manageable share of the annual budget. The city enacted broad pension reform in 2011 that has helped improve the funded position of its plans and reduce actuarial contribution requirements. The city is in the process of evaluating OPEB reforms that, if enacted, would be considered a positive credit consideration by Fitch.
SIGNIFICANT ECONOMIC CENTER: Atlanta anchors one of the largest and fastest growing regional economies in the country. Strengths center on the diversity of industry and employment opportunities present, a vast network of transportation infrastructure, and highly educated labor force. Challenges exist, however, notably the tendency for unemployment to hover above state and national norms and the tax base to fluctuate significantly, and high poverty rates despite strong per capita income levels.
OPERATING STABILITY: The rating is sensitive to changes in Atlanta's commitment to financial stability and maintenance of healthy reserves over time.
STRONG RESERVE POSITION FOLLOWING CONSECUTIVE YEARS OF SURPLUS RESULTS
The city's financial position remains on a very strong upswing. General fund operating surpluses (after transfers) have been recorded from fiscal year 2010 through 2014, adding a total of $134.6 million to the total fund balance. An additional increase in reserves between $3 million and $7 million is projected by management for fiscal 2015. The unrestricted fund balance for fiscal 2014 was $130.9 million or 24.5% of operating expenditures and transfers out. The city adopted a fairly conservative reserve policy in 2012 that requires a minimum unrestricted fund balance equal to 15% to 20% of spending. Liquidity is strong - the city maintains a pooled cash account which held $1.67 billion in fiscal 2014, equivalent to 2.8x current liabilities across the primary government and close to 10 months of expenses.
BUDGETARY TOOLS POSITION MANAGEMENT FOR STABLE FINANCIAL RESULTS
The current string of surplus operations was preceded by the depletion of $144.2 million in fund balance from fiscals 2005 through 2009 that drew the unreserved fund balance to an uncomfortably low $4 million or 0.9%. Critical to the city's turnaround and Fitch's expectation for stable results going forward was the eventual institution of more detailed and frequent financial reporting to minimize risk of unfavorable budgetary variances, particularly revenue shortfalls, which drove the aforementioned period of financial weakness. The city also demonstrated a willingness to increase taxes when needed, raising its general millage rate to 10.24 mills from 7.12 mills in 2010. Property taxes, which represent 30% of general fund budgeted revenue, may be increased by the city without limit (subject to certain public notice requirements). The general millage rate has been held flat since the 2010 increase and is competitive within the region.
Spending controls have been exercised in concert with the city's improved monitoring practices and revenue actions, evidenced by the fact that spending levels proposed for fiscal 2016 remain lower than the high point of fiscal 2008. Salaries and other employment benefits are not subject to collective bargaining or contractual agreement, affording the city good flexibility to manage the budget's primary expense driver. Recent budgets have begun to restore services and positions previously eliminated and, in turn, some capacity for additional cuts in the future, if needed. The proposed fiscal 2016 budget, which will be adopted later in the month, appears built on reasonable revenue assumptions and includes a $14.7 million appropriation for contingency/reserves.
PENSION REFORMS BENEFIT LONG-TERM OUTLOOK
In 2011 the city enacted very broad reforms of its pension plans for general employees, police, and fire that help improve the sustainability of the plans over time. Changes approved by the city include higher employee contributions for existing employees and enrollment of new hires into a hybrid plan with reduced benefits, a reduction in the benefit multiplier, a higher retirement age, and a 1% cap on cost of living adjustments. The city also instituted a risk-sharing component with plan members in the event that the city's annual contribution exceeds 35% of payroll.
The city's pension position has improved in recent years reflecting improved market performance and the aforementioned benefit changes. The aggregate funded ratio of the pension plans has improved to 67.6% in fiscal 2014 compared to 57% in fiscal 2010 (the current Fitch-adjusted funded ratio substituting the plans' 7.5% rate of return for 7.0%, is a slightly lower 64%). Funding of the actuarial required contribution (ARC) is sizable but much more affordable at $93 million in fiscal 2014 (10.4% of governmental fund spending) than the $143.6 million (15.3%) in fiscal 2009. The Fitch-adjusted unfunded actuarial accrued liability (UAAL) as of July 1, 2014 is still a sizable $1.49 billion or 2.8% of market value, but we believe the reforms implemented help ensure the sustainability of the plans over time.
The city's OPEB liability is similarly large at $1.48 billion as of the most recent actuarial report dated July 1, 2012. The city funds its OPEB costs on a pay-go basis, with fiscal 2014 contributions totalling $29.9 million for governmental funds or 3.3% of spending. The city has indicated it is reviewing potential plan changes to its retiree health plan to alleviate its OPEB liability.
MODERATE DEBT BURDEN
The city's debt burden is estimated by Fitch at a moderate $3,754 per capita or 3.1% of market value inclusive of the proposed issuance. Annual debt service comprised a moderate 9.3% of governmental fund spending in fiscal 2014. The debt service impact associated with the proposed issuance is expected to be a very manageable $7.4 million (0.8% of governmental fund spending) net of certain refunding and defeasance activity earlier this fiscal year. Amortization is standard with 59% of principal retired within 10 years. General government capital needs outlined in the 2015-2019 capital improvement plan are estimated at $661 million (1.2% of market value) which management expects to finance from a combination of operating revenue and grants - there are no plans for additional borrowing over the near term.
BROAD AND EXPANDING ECONOMIC BASE
Atlanta serves as the core of the 9th largest MSA in the nation measured by population (5.7 million) and non-farm employment (2.6 million), 10th largest by real gross metro product ($305.3 trillion), and 11th largest by personal income ($250.9 trillion) according to Global Insight. Historical and forecasted growth rates are strong and comparable to other large U.S. metro areas.
The MSA is home to the corporate headquarters for large employers including Coca-Cola, AT&T, Home Depot, UPS, The Home Depot, SunTrust and Delta Air Lines. Employment opportunities are diverse led by the professional and business services sector (18.4%), retail and wholesale trade (17%), education and health services (12%), and leisure and hospitality (10%) according to the Bureau of Labor Statistics. The higher wage professional and business service sector is 133% of the national standard. The city is home to Hartsfield-Jackson International Airport (Hartsfield), the world's busiest airport, and is situated at the confluence of a network of interstate highways that support the significant trade and transportation sector.
The city's population (447,841 in 2014) continues to grow steadily but at a rate that trails the surrounding counties and the MSA as a whole. Educational attainment is high with 19% of the city's adult-aged population holding an advanced degree (roughly 179% of the national standard). Per capita income measures are strong, registering between 127% and 153% of Georgia and U.S. norm; however, high poverty levels reflect an income dichotomy consistent with large urban cities. The city's higher proportion of college-aged residents likely contributes to its moderately below-average median household income.
EXPOSURE TO VOLATILE HOUSING AND LABOR MARKETS
The larger risk to the city from an economic point of view is the volatility in jobs and housing. The city's unemployment rate (6.7% in March) typically registers above the Georgia and U.S. rates and tends to spike quite high in periods of economic stress which in part reflects its growth-fuelled exposure to construction and housing. Assessed value from fiscals 2008 through 2013 declined in aggregate 23% following a run-up in valuation of 37% from fiscals 2005 through 2008. Current indicators are positive, with Atlanta May home values up 11.8% on the year according to Zillow Group and the S&P/Case-Shiller Home Price Indices for March 2015 depicting 5.4% annual growth for the Atlanta MSA.
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 informed by information from Creditscope, S&P/Case-Shiller Home Price Index, and IHS Global Insight.
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)