Fitch upgrades Chattanooga, Tennessee, to AAA

Fitch Ratings upgraded Chattanooga, Tennessee’s issuer default rating and $150 million of outstanding general obligation bonds to AAA from AA-plus.

Also on Thursday, Fitch assigned AAA ratings to the city’s upcoming $12.28 million of Series 2021A GOs and $21.96 million of Series 2021B GO refunding bonds. The bonds are scheduled to competitively around Nov. 16.

Proceeds of the Series 2021A GOs will be used to fund various capital projects while proceeds from the Series 2021B GOs will refund certain outstanding GO bonds for savings.

The rating outlook is stable.

Fitch said the IDR and GO upgrades to AAA “reflect the city’s sustained reduction in its long-term liability burden and Fitch’s expectations of a stable burden going forward, supported by growth in the underlying resource base. The AAA rating also reflects a solid level of expenditure flexibility and a high level of unrestricted reserves supporting the city’s ability to withstand the effects of future downturns.”

The GOs carry the city’s full faith and credit pledge and are payable from an unlimited ad valorem tax levied on all taxable property within the city.

Additionally, Fitch raised the Chattanooga Industrial Development Board’s $9.9 million of Series 2010 lease rental revenue refunding bonds, defeased to maturity, to AA-plus from AA.

Fitch said the AA-plus rating on the IDB’s bonds is one notch below the issuer default rating, reflecting the city’s covenant to budget appropriate revenues if necessary to pay debt service. The IDB’s bonds are backed by payments equal to debt service, which the city will fund with various city revenues. If the revenues aren’t enough to pay, the city will appropriate the funds.

Chattanooga is in southeastern Tennessee, in Hamilton County, which is rated AAA by Fitch with a stable outlook. The city’s 2020 census showed a population of 181,099, up 8% since 2010.

During the COVID-19 pandemic, Chattanooga experienced a moderate impact to its financial operations. Revenues were in stronger than expected in fiscal 2020 amid conservative spending assumptions.

During the pandemic, the city suspended employee travel, delayed hiring and halted raises for employees. By the end of fiscal 2020, local option sales tax revenues were up $1.3 million with state sales tax revenues up around 7%.

The city received $220,000 in CARES Act funding for protective equipment and other related pandemic costs as hotel and motel occupancy tax revenues fell almost 12% year over year.

In fiscal 2021, the city received $13.6 million in federal and state pandemic related grants and $1.7 million was used for general fund operations.

Under the American Rescue Plan Act, the city was allocated $38.6 million, with the part received in May and the second half coming in 2022.

Fitch said it expects Chattanooga to maintain strong financial resilience throughout the next economic cycle.

“The city has built a high reserve cushion and is committed to maintaining reserves at or above its operational goal of 20% versus its formal 15% policy,” Fitch said. “While reserves would likely decline in a moderate recession scenario (1% decline in national GDP) absent policy action, Fitch expects management would take actions to reduce operational and capital spending as necessary to mitigate the level of drawdowns on reserves.”