Fitch Rates Chattanooga, Tennessee's GOs 'AA' & Lease Revs 'AA-'.

NEW YORK -- Fitch assigns an 'AA' rating to Chattanooga, Tennessee's approximately $24.9 million general obligation (GO) refunding bonds, series 2007A and 2007B, and an 'AA-' rating to the Industrial Development Board of the City of Chattanooga's (IDB) approximately $56.9 million lease rental revenue refunding bonds, series 2007. The bonds are scheduled to sell the week of March 26; the IDB bonds with a credit enhancement. Morgan Keegan & Company Inc. and Lehman Brothers are the co-senior managers, and Public Financial Management, Inc. is the city's financial advisor. Also, Fitch affirms the 'AA' rating on the city's approximately $222.3 million of outstanding GO bonds and the 'AA-' on the IDB's approximately $58.4 million lease rental revenue bonds. The Rating Outlook on all bonds is Stable.

The 'AA' rating on Chattanooga's GO refunding bonds reflects the city's solid fiscal performance and financial management highlighted by policies for maintaining ample reserves and manageable capital needs. The city's economy is moderately diversified, and retail sales are higher given the presence of a major regional mall that serves a seven-county metropolitan area. Credit concerns center on the high debt burden and slow rate of debt retirement. The series 2007A GO bond proceeds will refund a portion of the city's outstanding series 2001 GO bonds, payable from unlimited ad valorem taxes. The series 2007B GO bond proceeds will refund a portion of the outstanding series 2002 GO bonds; these bonds have a pledge of hotel tax revenues with an additional pledge of the city's unlimited ad valorem taxes.

The 'AA-' rating on the IDB bonds is based on the City of Chattanooga's covenant to budget and appropriate revenues from any legally available source to pay debt service on the series 2007 bonds and to replenish deficiencies in the debt service reserve fund. The rating also factors in sources of repayment including the state's apportionment of revenues pursuant to the Convention Center and Tourism Development Act of 1998, all proceeds of a citywide 0.25% local option sales and use tax, and net revenues of the projects. The IDB's series 2007 bonds will refund a portion of the outstanding series 2000 lease rental revenue bonds.

The Industrial Development Board of the City of Chattanooga was formed to increase employment opportunities in Chattanooga. It fosters various economic development projects and promotes the city as a good locale for businesses. The IDB issued its lease revenue rental bonds in 2000 for the benefit of the Chattanooga Downtown Redevelopment Corporation (CDRC) (formerly the Southside Redevelopment Corporation), a not-for-profit entity created to coordinate four projects: an expansion of the Chattanooga Convention Center, and the construction of a new parking garage, city office building, and conference center.

Chattanooga is located in southeastern Tennessee in Hamilton County (GO bonds rated 'AA+' by Fitch). At the juncture of Interstates 24, 59, and 75, the city serves as the regional economic center of a four-county area that extends across the Georgia state line; it is approximately equidistant from both Atlanta and Nashville. Chattanooga's population was 154,762 in 2005, down 1.0% from 2000. Although the manufacturing sector accounts for a slightly above-average proportion of employment in the area, the city's economy is stabilized by employment provided by a mix of health care, higher education, transportation, retail, and financial services companies. Ongoing development projects include the construction of Blue Cross Blue Shield of Tennessee's $300 million office campus to house its existing workforce and Memorial Hospital's planned $320 million expansion of its facility to accommodate an additional 700 positions. The city's unemployment rate of 4.1% in December 2006 was above the county rate of 3.7% but below that of the state and nation. Income levels in surrounding Hamilton County are 112.7% of the state and on par with the national average.

Financial operations are sound and stable, supported by high reserve levels. The total unreserved general fund balance has been at or above 21% of expenditures, transfers out, and other uses in each of the past five fiscal years. Fiscal 2006 ended with a healthy $8.6 million general fund operating surplus, with the unreserved general fund balance equaling a high 26.8% of expenditures, transfers out, and other uses. The surplus resulted from better-than-expected tax receipts and intergovernmental transfers and a slight decline in operating expenditures over the fiscal 2005 level. The fiscal 2005 balance had declined slightly, but net of spending on pay-as-you-go capital projects, operating results were positive.

Debt levels have nearly doubled since fiscal 2000, partly resulting from economic development debt issuances, and the amortization rate has slowed considerably. However, the city has dedicated tax revenue sources to meet debt service payments on debt issued for economic development projects. Overall debt is moderately high at 5.3% of full market value and $4,240 per capita. The city demonstrates sound capital planning in its $174.1 million five-year capital improvement plan (CIP) through fiscal 2011, with annual pay-as-you-go appropriations supported by a portion of a one-half-cent sales tax dedicated to economic development projects.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.