NEW YORK, N.Y. – NEW YORK–(BUSINESS WIRE)–Mar 3, 2016–Fitch Ratings has assigned a rating of ‘AA+’ to the following revenue bonds to be issued by the Atlanta Downtown Development Authority, Georgia:
–$10,000,000 revenue bonds (city plaza redevelopment project), series 2016.
The bonds will be sold via competitive sale on or about March 25. Proceeds will reimburse the authority for a portion of the cost incurred in the December 2015 acquisition of a mixed-use development known as City Plaza, which includes a 3.1-acre parcel of land, 164 residential units, 29,000 square feet of ground level retail, a 326-space parking garage and surface lot, and other improvements located in Atlanta’s central business district across from city hall. The bonds will have a final scheduled maturity date of Dec. 1, 2035.
Fitch currently rates $252 million of outstanding parity city of Atlanta general obligation (GO) public improvement bonds, series 2015 and $8 million various purpose GO bonds, series 2016 scheduled for competitive sale on March 8 ‘AA+’.
The Rating Outlook is Stable.
The revenue bonds are a limited obligation of the authority payable from installment payments made by the city of Atlanta in an amount equal to debt service on the bonds. The obligation of the city to make the installment payments is absolute and unconditional and is backed by the city’s full faith and credit and taxing power without limitation as to rate or amount.
KEY RATING DRIVERS
HEALTHY RESERVE POSITION: General fund unrestricted balances exceeding one-quarter of annual spending in fiscal 2015 provide a comfortable cushion against unanticipated budgetary stress. Reserves recently have exceeded the city’s 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 control 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, as are the carrying charges for these obligations relative to the annual budget. Broad pension reforms have helped improve the funded position of the city’s plans and reduce actuarial contribution requirements.
SIGNIFICANT ECONOMIC CENTER: Atlanta anchors one of the largest and fastest growing regional economies in the country. Strengths centre on the diversity of industry and employment opportunities present, a vast network of transportation infrastructure, and a highly educated labour force. Challenges exist, however, notably the tendency for unemployment to hover above state and national norms and the tax base to fluctuate significantly, and for poverty rates to remain high 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.
The development authority is a component unit of the city responsible for the promotion of economic development within the city’s central business district. The development authority is governed by seven directors appointed by the city council; the mayor of the city and the chair of the community development and human resources committee of the city council are ex-officio directors of the development authority.
The authority and the city will enter into an intergovernmental agreement of sale pursuant to which the authority will sell the City Plaza project to the city, and the city will make payments to the authority equal to the principal of and interest on the bonds. The city has pledged its full faith and credit and taxing power without limitation as to rate or amount to back its obligation under the intergovernmental agreement of sale; as such, the rating on the authority’s revenue bonds reflects the city’s GO rating.
CITY CONTINUES TO POST STRONG OPERATING RESULTS AND RESERVE POSITION
The city’s financial position remains on a very strong upswing. General fund operating surpluses (after transfers) have been recorded from fiscal 2010 through 2015, adding a total of $143.6 million to the total fund balance. The unrestricted fund balance for fiscal 2015 was $149.1 million or 27.1% 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 $1.8 billion in fiscal 2015, equivalent to 2.8x current liabilities across the primary government and 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% of spending. 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 unfavourable 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 31% of general fund budgeted revenue in fiscal 2016, may be increased by the city without limit (subject to certain public notice requirements). The general millage rate has been held flat or rolled back to the revenue-neutral rate 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 adopted 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. Tempering this credit strength are the rather high charges associated with the funding of debt, pension, and OPEB, which consumed 32% of governmental spending in fiscal 2015. Actuarially required pension contributions have been trending downward in recent years and new money debt issuance plans are limited, which should keep the cost of these commitments from increasing much in the near term. Furthermore, the city has demonstrated the capacity to accommodate these costs in recent budgets and still achieve positive year-end results.
Recent budgets have begun to restore services and positions previously eliminated and, in turn, some capacity for additional cuts in the future, if needed. Fiscal 2016 represents the sixth consecutive year the general fund budget was balanced without the use of reserves; in fact, the budget appropriates a 2.5% (or $14.7 million) reserve for contingency. The budget of $593.1 million represents an increase of $25.2 million or 4.4% over the adopted fiscal 2015 budget. Property taxes are up $11 million or 6.3% driven by new construction as the city adopted the revenue neutral roll-back rate of 8.89 mills this year.
PENSION BURDEN STILL HIGH BUT 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 enrolment 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 reported ratio of assets-to-liabilities of the pension plans was 70.7% as of July 1, 2014; the Fitch-adjusted funded ratio was 67.3% substituting a 7.0% rate of return assumption for the plan’s 7.5%. The Fitch-adjusted net pension liability remains significant at $1.35 billion or 2.4% of market value, but we believe the reforms implemented help ensure the sustainability of the plans over time. Annual pension contributions for fiscal 2015 (defined benefit and defined contribution plans) total $109.6 million or 13.5% of governmental spending compared to $147.6 million or 18% in fiscal 2009.
The city’s OPEB liability is similarly large at $1.12 billion or 2.0% of market value as of the most recent actuarial report dated June 30, 2014. The city funds its OPEB costs on a pay-go basis, with fiscal 2015 contributions totalling $28.2 million for governmental funds or 3.5% of spending. The city has indicated it is reviewing its retiree health care plan to alleviate its OPEB liability but does not expect to enact any plan changes for another 18-24 months.
MODERATE DEBT BURDEN
The city’s debt burden is estimated by Fitch at a moderate $4,228 per capita or 3.4% of market value. The overall debt burden increased by roughly one-third last year due to the issuance of $252 million in GO bonds and $224.7 million in revenue bonds supported by hotel tax receipts to fund a portion of the cost of a new stadium for the NFL’s Atlanta Falcons franchise. Amortization is standard with 55% of principal retired within 10 years. General government capital needs outlined in the 2016-2020 capital improvement plan are estimated at $657.3 million (1.2% of market value), which management expects to finance from a combination of operating revenue and grants – additional new money debt issuance plans are very limited.
BROAD AND EXPANDING ECONOMIC BASE
Atlanta serves as the core of the 9th largest MSA in the nation as measured by population (5.8 million) and non-farm employment (2.7 million), 10th largest by real gross metro product ($316.6 trillion), and 11th largest by real personal income ($269.5 trillion) according to IHS Inc. Historical and forecasted growth rates are strong and comparable to other large U.S. metro areas. According to the Bureau of Labor Statistics (BLS), Atlanta’s economy is the fastest growing among the nation’s 12 largest MSAs during the 12-month period ending November 2015, registering a 3.1% increase in total non-farm employment. Employment opportunities are diverse led by the professional and business services sector (18%), retail and wholesale trade (17%), education and health services (12%), and leisure and hospitality (10%). The higher-wage professional and business service sector is 133% of the national standard.
The MSA is home to the corporate headquarters for large employers including Coca-Cola, AT&T, Home Depot, UPS, SunTrust and Delta Air Lines. Delta is the largest employer in the city with 4,357 employees or 2.2% of total city employment. 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.
Educational attainment is high with 19% of the city’s adult-aged population holding an advanced degree (roughly 179% of the national standard). Personal income per capita measures are strong, registering 144% of the Georgia and 128% of the U.S. norm. High poverty levels reflect an income dichotomy consistent with large urban cities and a higher proportion of college-aged residents.
EXPOSURE TO VOLATILE HOUSING AND Labour 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 (5.6% in December 2015) typically registers above Georgia’s and the 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 – January home values were up 9.9% on the year according to Zillow Group, and the one-year change for the Atlanta MSA according to the S&P/Case-Shiller Home Price Indices was 5.5% as of December 2015.
Date of Relevant Rating Committee: Feb. 26, 2016.
Additional information is available at ‘ www.fitchratings.com ‘.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, Lumesis and IHS Global Insight.
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
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CONTACT: Fitch Ratings
Fitch Ratings, Inc.
33 Whitehall Street
New York, N.Y. 10004
Barbara Ruth Rosenberg
Elizabeth Fogerty, New York, +1-212-908-0526
KEYWORD: UNITED STATES NORTH AMERICA GEORGIA NEW YORK
INDUSTRY KEYWORD: PROFESSIONAL SERVICES URBAN PLANNING FINANCE CONSTRUCTION & PROPERTY
SOURCE: Fitch Ratings
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PUB: 03/03/2016 05:00 PM/DISC: 03/03/2016 04:59 PM