Fitch Ratings - New York - 23 Nov 2021: Fitch Ratings has assigned a rating of 'AA+' on Atlanta, GA's $3,270,000 various purpose GO bonds, series 2021B and $191,695,000 GO refunding bonds, taxable series 2021C.

The Rating Outlook is Stable.

The proceeds of the series 2021B bonds will be used to finance various municipal improvements, including the renovation of police and fire facilities. The proceeds of the taxable series 2021C bonds will be used to refund all or a portion of various outstanding GO bonds for debt service savings.

SECURITY

The GO bonds are backed by the full faith and credit and unlimited taxing power of the city.

IDR ANALYTICAL CONCLUSION

Atlanta's broad revenue raising powers, full legal control over employee-related wages and benefits, and high reserves, support the 'AA+' rating on the Issuer Default Rating (IDR), GO bonds, and various revenue bonds backed by the city's full faith and credit. Long-term liabilities are moderate relative to a large and diverse economic resource base that is expected to resume a healthy pace of growth.

(SEE BELOW FOR DEDICATED TAX ANALYSIS)

Economic Summary

Atlanta anchors one of the largest and fastest growing economies and population centers in the U.S. The economy features good industry diversification, a well-developed network of transportation assets, a well-educated labor pool, and comparatively low business costs relative to other large U.S. metro areas. Weaknesses center on the city's high poverty rate and propensity for comparatively high unemployment.

IDR KEY RATING DRIVERS

Revenue Framework: 'aa'

General fund revenues are comprised of a mix of property taxes and various economically sensitive revenues, which had been rising at a solid pace prior to the pandemic due to expansion of the city's tax base and economy. Economic and demographic fundamentals are expected to support inflationary levels of revenue growth. The city's broad legal control over property taxes and various other general fund sources provide significant flexibility to address budgetary risks associated with cyclical stresses.

Expenditure Framework: 'aa'

Employee wages and benefits are not contractually stipulated, giving the city broad flexibility to address current and future budgetary pressures and tempering the risk associated with a higher debt and retiree benefit payment burden. Current spending pressures center on public safety needs and somewhat high fixed carrying costs for debt and pensions.

Long-Term Liability Burden: 'aa'

Fitch believes the city's long-term liability burden could rise to approximately 10% of personal income, which is at the low end of the 'aa' range, as it addresses sizable deferred maintenance needs. Pension liabilities account for the largest component of the long-term liability burden, but reforms effective in 2011 preclude new entrants into defined benefit plans for general and public safety employees.

Operating Performance: 'aaa'

Broad-based fiscal tools, strengthened budgeting practices and adherence to conservative formal reserve policies underpin Fitch's expectations that the city will retain a high level of fundamental financial flexibility through future economic cycles.

 RATING SENSITIVITIES

Factors that could, individually or collectively, lead to a positive rating action/upgrade:

--A sustained reduction in the city's long-term liability burden to less than 10% of estimated total personal income in combination with improvement in the long-term outlook for revenue growth to a level that consistently exceeds inflation.

Factors that could, individually or collectively, lead to a negative rating action/downgrade:

--Continued reliance on non-structural budgetary solutions that weakens the city's reserve position and financial resilience.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

CURRENT DEVELOPMENTS

Atlanta continues to maintain a high level of fundamental financial flexibility, but its dependence on federal stimulus to support ongoing operating costs warrants attention. Fiscal 2020 (June 30 year-end) general fund results yielded a $7.8 million operating deficit equivalent to 1.2% of operating expenditures and transfers out. Fiscal 2020 general fund revenue totaling $639 million (including transfers in) declined $22.4 million or 3.4% compared to fiscal 2019, while total spending (including transfers out) was relatively flat. The deficit lowered general fund unrestricted reserves to a still healthy $157.3 million or 24.3% of total spending. Atlanta's reserve policy adopted in 2012 requires a minimum unrestricted fund balance equal to 15% to 20% of spending.

At adoption, the fiscal 2021 budget forecasted general fund revenue totaling $639 million and the use of $34 million in reserves to balance the budget. The city reported $40 million in cost cutting actions while avoiding layoffs or furloughs and funding previously agreed upon wage increases for police officers and firefighters. According to the city, preliminary year-end general fund revenue came in very close to budget. Mid-year the city was allocated $171 million in American Rescue Plan Act (ARPA) funds and appropriated $64 million from its initial tranche for fiscal 2021 revenue replacement. As a result, the city estimates the general fund deficit at year-end at approximately $5 million (about 0.7% of spending).

The adopted fiscal 2022 general fund budget totals $710 million. Yoy spending growth is largely driven new positions and pay increases for police and fire. The budget projects general fund revenues at $647 million and appropriates an additional $55 million in ARPA funds for recurring operating costs plus $8 million in reserves. The budget assumes a decline in property taxes and local option sales taxes of approximately 1.8% and 7.6%, respectively, compared to the fiscal 2021 budget, which Fitch considers conservative. The city's tax digest increased close to 7% yoy, and unaudited fiscal 2021 sales tax revenue was up almost 15% compared to the adopted budget.

The remaining ARPA allocation is earmarked for violence reduction initiatives, small business assistance, rental assistance and food insecurity. The use of ARPA funds for operations has enabled the city to avoid meaningful cost cutting measures impacting headcount or service delivery, while maintaining a flat tax rate. Concerns about the reliance on one-time sources to fund the fiscal 2021 and fiscal 2022 budgets are tempered by the strong fiscal performance and accumulation of reserves in the years leading up to the downturn. Fitch expects the city to utilize the broad budgetary tools at its disposal to scale back on non-recurring solutions in order to restore structural balance to the operating budget.

Buckhead Incorporation

Fitch will continue to monitor developments regarding the potential incorporation of Buckhead. The prospects for successful incorporation and the execution timeframe are unclear at this time. A successful incorporation could impact the city's overall credit profile as Buckhead represents a sizable percentage of the city's population and tax base.

ECONOMIC RESOURCE BASE

Atlanta is the state capitol of Georgia. The city occupies a land area of 134 square miles with a 2020 population of 498,715 - an increase of nearly 19% since 2010. The city serves as a national corporate and transportation hub, historically anchoring the state economy. Economic interests are diverse, inclusive of a large wholesale trade presence, which is sensitive to global markets and trade policies. Employment continues to rebound with a September unemployment rate of 3.2%. Economic challenges center on the city's historic susceptibility to periods of high unemployment and a high poverty rate, which may reflect an income dichotomy consistent with many large urban cities.

IDR CREDIT PROFILE

Revenue Framework 

The city has a notable degree of exposure to economically sensitive revenues with various license and permit revenue, local option sales tax (LOST) and other local taxes (including utility and alcoholic beverage) combining to account for roughly 50% of general fund revenue. LOST revenue consists of a 1% sales and use tax shared between Fulton County and municipalities within the county based on population. Property taxes constitute the single largest source of general fund revenue at about one-third of the total.

Revenue performance over the prior decade has been sound, registering a CAGR of 3.0% through fiscal 2020, adjusted for changes in the general fund ad valorem tax rate. The city has actively managed its millage rate in response to changes in the economic environment and tax base to preserve its financial position. The tax digest for fiscal 2022 marks the eighth consecutive year of growth, which has allowed the city to gradually lower the millage rate to 7.85 mills in fiscal 2022 from 10.24 mills in fiscal 2013. The volatile history of the city's tax base is evident in the more than 50% increase recorded from fiscal years 2004-2008, which was followed by five consecutive years of decline totaling 23% in aggregate. 

The city has very broad legal revenue raising authority as its property tax rate and levy are not subject to a cap or external approval. The city also retains flexibility with regard to its business licenses and fines and forfeiture revenue streams (sales tax revenues are subject to voter approval and public utility franchise fees are limited pursuant to state law).

Expenditure Framework 

General fund spending is driven by the cost of personnel wages and benefits, which consume about 66% of the fiscal 2022 budget, followed by purchased or contracted services at 13%. The city has fairly broad legal control over employee-related expenditures given the absence of collective bargaining. At the department level, police and fire services account for approximately 33% and 15% of general fund spending, respectively.

General fund spending levels have essentially mirrored revenue performance prior to the pandemic-driven declines. Fitch expects a similar pattern to materialize over time with changes in population and inflation key determinants of both spending and revenue in the absence of policy action or material increases in debt and/or retiree benefit costs.

The city has an adequate level of spending flexibility, driven by its broad legal control over employee-related spending, which is not dictated by collective bargaining or contractual agreement. Recent general fund budget growth has largely been directed at improving existing employee wages and benefits, funding for new police vacancies, parks and recreation and transportation infrastructure and maintenance.

 Debt service, pension, and estimated other post-employment benefit (OPEB) contributions consumed 26.5% of governmental fund spending in fiscal 2020, which is high for the 'aa' framework assessment. Fitch estimates the metric would be several percentage points lower if adjusted for the proportional share of annual pension and OPEB costs related to enterprise fund employees. Debt service accounted for 12% of governmental spending with roughly half of the debt service burden associated with various tax allocation districts whose property tax revenue is not legally available to fund the general operations of the city. Annual debt service requirements associated with the city's GO and certificate indebtedness declines by roughly $20 million by fiscal 2029, providing capacity to absorb manageable new money issuance plans without further burdening the city's budget. 

The city has consistently funded the full actuarially determined contribution (ADC) for pension benefits, which consumed 8% of governmental fund spending in fiscal 2020. However, Fitch's supplemental pension metric, which assumes a 20-year level payoff of the Fitch-adjusted liability, indicates that contributions at the actuarial level would likely be insufficient to reduce pension liabilities over time. 

Long-Term Liability Burden

Fitch estimates the city's long-term liability burden at 8% of personal income. The largest component of the metric is the city's net pension liability (NPL) associated with three defined benefit pension plans for full-time employees - the general employees' pension plan (GEPP), the police officers' pension plan (PPP) and the firefighters' pension plan (FPP). Fitch's pension analysis is based on a standard 6.0% investment rate of return whereas the city plans' discount rates range from 7.25%-7.4%. The Fitch-adjusted NPL is equivalent to roughly $1.9 billion or more than 4.2% of personal income. As of the June 30, 2020 measurement date, the combined pension plans' ratio of assets to liabilities was approximately 74% and 63% on a reported and Fitch-adjusted basis, respectively.

The actual pension burden on the general government is somewhat overstated as approximately 33% of the city's reported NPL is attributed to employees of various self-supporting enterprise operations. Furthermore, the city enacted a broad-based pension reform package several years ago which should help control the rate of growth in the city's pension burden going forward. Effective Sept. 1, 2011, all newly hired general employees and sworn members of the fire and police departments are required to participate in a hybrid plan with reduced benefits. The city also instituted higher employee contributions for existing and new plan members, a higher retirement age, a 1% cap on cost-of-living-adjustments, and a soft cap on its annual pension contribution to share market risk with plan members. 

Fitch estimates the city's direct debt at more than $1 billion or 2.3% of personal income. More than $400 million in outstanding governmental debt is scheduled to amortize within the next five years providing capacity to finance the $318.5 million in general government capital projects forecast from fiscal 2022-2026. An additional $656.5 million in SPLOST capex are also planned over this period on a pay-go basis. The city plans to ask voters to approve additional GO borrowing authority in the range of $350 million to $400 million and reauthorize the 0.4% special purpose local option sales tax for transportation (T-SPLOST) for various transportation and congestion relief projects.

The city has approved nearly $1.9 billion in public subsidies in the form of incremental property and sales tax over the next several decades to the developer of the $5 billion Centennial Yards project adjacent to the Mercedes-Benz Stadium in downtown Atlanta. Fitch expects the city will issue additional debt backed by the incremental revenue streams from the project over its development horizon.

Operating Performance

The strength of the city's unrestricted reserve position and fiscal tools position it to manage future budgetary shocks. Budget flexibility is largely evident in the city's independent legal ability to raise property taxes, which the city has exercised during prior periods of stress. Fitch deems expenditure flexibility adequate despite the somewhat high charges associated with debt and retiree benefit costs. The Fitch Analytical Stress Test (FAST) model relates historical tax revenue volatility to GDP to support the assessment of operating performance under Fitch's criteria. The FAST is not a forecast, but it represents Fitch's estimate of possible revenue behavior in a downturn based on historical revenue performance. The city's FAST results indicate a manageable level of general fund revenue volatility (a 2.8% year one decline) under Fitch's standard -1% U.S. GDP scenario.

DATE OF RELEVANT COMMITTEE

27 September 2021

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

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.