Market Overview

Fitch Upgrades Blount County (TN)'s IDR to 'AA' on Criteria Change; Outlook Stable

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'AA' rating to the following general obligation (GO) bonds of Blount County, Tennessee (the county):

--$9,825,000 GO taxable bonds series 2016A;

--$117,795,000 GO bonds series 2016B.

The GO bonds are expected to sell on or about November 3 via negotiated sale. Bonds proceeds will be used to refund various maturities for present value savings and fix out previously variable rate debt.

In addition, Fitch upgrades the following ratings to 'AA' from 'AA-':

--$78.8 million of Blount County GO bonds, series 2004A, 2004B, 2005, 2011, 2015A and 2015B;

--$21.9 million in local government public improvement bonds issued by the Blount County public building authority (PBA), series B-16-A, and B-10-A;

--Issuer Default Rating.

The Rating Outlook is Stable.

SECURITY

The GO bonds are direct general obligations of the county to which it has pledged its full faith and credit and unlimited taxing power as security.

The local government public improvement bonds are a limited obligation of the PBA, secured by receipts under a loan agreement between the PBA and the county, to which the county has pledged its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

The upgrade reflects application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18. The revised criteria highlight the county's strong revenue framework, low long-term liability burden, and significant gap-closing capacity. The county's 'AA' IDR and GO rating are based on healthy fund balances and strong revenue growth. These factors somewhat offset the above average debt service costs that limit the county's control of expenditures.

Economic Resource Base

Blount County is located in eastern Tennessee and incorporates the Great Smoky Mountains National Park in the southern portion that borders North Carolina. The county seat of Maryville is located approximately 15 miles south of Knoxville, TN. The county has a 2015 population of 127,253.

Revenue Framework: 'aaa' factor assessment

Just over half of general fund revenues are funded from property taxes, which have increased on par with national GDP growth. The county retains the unlimited legal ability to adjust the tax rate. Fitch believes the prospects for revenue growth are strong based on the historical performance and continued economic expansion in the greater Knoxville region and in the county's tax base based on significant private investments recently announced.

Expenditure Framework: 'aa' factor assessment

The flexibility of main expenditure items is adequate and constrained by above average carrying costs at 26% of spending.

Long-Term Liability Burden: 'aa' factor assessment

The county's low long-term liability burden at about 8% of personal income reflects the county's minimal unfunded pension liability. Neither the county nor the school district has any new debt plans currently. The variable rate debt level remains elevated.

Operating Performance: 'aaa' factor assessment

The county consistently maintains general fund reserves above a level that Fitch considers satisfactory for the rating category based on the high degree of budgetary flexibility.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL PROFILE: The rating assumes the county's continued strong financial flexibility, revenue growth prospects and budget controls.

CREDIT PROFILE

Blount County acts as a bedroom community for the growing Knoxville, TN MSA, population 861,424. IHS reports an impressive advancement in the local economy with employment increases, an expanding labor force and declining joblessness. Stability is derived from the University of Tennessee in Knoxville and the UT Medical Center. The U.S. Department of Energy's Oak Ridge National Laboratory stimulates a growing research and development sector and could lead to higher income metrics in the future. County income levels are currently on par with the state but modestly below the U.S. norm.

The county is home to several prominent manufacturing concerns including aluminum producer Alcoa and auto parts manufacturer Denso. Both have maintained a long-standing presence within the county and have capital intensive operations in various states of expansion. Alcoa completed a $300 million expansion in 2015, Denso broke ground in July on a $400 million plant expansion that will provide 400 new jobs and Advanced Munitions International announced at the end of 2015 plans to invest $550 million, hire 600 workers and move their headquarters to the county. Tax base concentration is not a concern as the top 10 taxpayers are just under 10% of total assessed value (TAV).

Revenue Framework

General fund revenues are primarily derived from property taxes (51%), as well as a diversity of other local permits and fees that make up an additional 19%. Together, state and federal intergovernmental revenues make up 17%. The local option sales tax directly funds highway spending, debt service and schools outside of the general fund.

General fund revenues increased along the lines of national GDP growth over the decade from 2004-2014 and TAV grew stronger still without a material change in the property tax rate. Fitch expects continued strong growth based on economic performance of the region. Zillow Group reported home values in the county were up 7% year-over-year in October 2016.

The county maintains the unlimited legal ability to increase the property tax rate.

Expenditure Framework

Nearly half the county's general fund expenditures are for public safety, followed by general government spending at 38% of the budget. Schools are a component unit of the county that drive the county's debt service spending (the county issues school debt), but schools pay their own operating costs and have a separate school millage.

The county's spending obligations are likely to increase at or slightly ahead of revenues in absence of policy action to control spending based on the service needs of the growing revenue base.

An elevated 26% of governmental expenditures are for fixed carrying costs associated with debt service, required pension contributions and OPEB actual payments. While debt service alone is almost 21% of spending, the potential for increased carrying costs is somewhat limited due to the pension plan's lack of a net pension liability at year-end fiscal 2015. The debt service metric at 21% of governmental spending is somewhat high, but includes debt service for the school district without the related school expenditures that are spent outside the governmental funds. Including school district spending, carrying costs are 15%.

The county has broad discretion over headcount and the terms of employee wages and benefits given the absence of collective bargaining in Tennessee. Headcount reductions were imposed during the recent downturn when the county cut 10% across the budget in fiscals 2010 and 2011, and could be used again if necessary.

Long-Term Liability Burden

The county's modest long-term liability burden of approximately 8% of personal income benefits from pension plan assets that cover 100% of the liability reported at year-end fiscal 2015. The county provides defined pension benefits through a cost-sharing multiple-employer plan administered through the Tennessee Consolidated Retirement System.

The remaining portion of the liability burden is made up of outstanding debt. Debt amortization is average and the county reports no major infrastructure needs or borrowing plans for general government or the school district, whose debt the county issues. The county does not create a formal capital plan for general government needs, but does for the school district. The district's five year $12.5 million capital plan expects no new debt issuance. The county is currently involved in a needs assessment that is evaluating two existing high schools that will likely enlarge future capital plans and may entail additional debt.

The current debt issuance will refinance all of the county's variable rate debt for general government and schools at a fixed interest rate. The refinancing includes a $5 million cash payment from debt service fund balance to terminate interest rate swaps. In addition, the county implemented a new four cent tax rate dedicated to fund the school capital plan and increased the general debt service millage by six cents in fiscal 2016. The county also issued variable rate GO debt for the Blount Memorial Hospital, a component unit of the county, which is about 28% of the county's total direct debt. About three quarters of this variable rate debt is hedged through derivative agreements with Deutsche Bank (Fitch long-term rating of 'A-'). The market value of the swaps is negative for the county, but there is no risk to collateral posting and the bank may only terminate following a county event of default defined as a downgrade to 'BBB+' or below. Although the hospital in most cases is able to cover debt service with net revenues, there is still some risk to the county. When including the hospital debt, the county's long-term liability burden is 9.3% of personal income.

Operating Performance

Fitch expects the county to maintain a healthy fund balance above what the 'aaa' reserve safety margin considering the revenue volatility and the county's high budgetary flexibility. The county has adjusted the property tax rate as necessary in recent years, though not without spending down fund balance as well. Fiscal 2015 ended with performance ahead of budget and produced break-even results. Government-wide cash balances were weak at fiscal year-end, which is near the low point for the year's cash cycle.

The county increased pay-as-you-go capital spending during the recovery and maintains the ability to adjust headcount through attrition, if necessary. Fiscal 2016 unaudited results show a surplus of $3.9 million adding to the existing $10.7 million total fund balance.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013868

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