Fitch Rates Metro Nashville-Davidson, Tennessee's $355MM GOs 'AA+'.

NEW YORK -- Fitch Ratings assigns an 'AA+' rating to the Metropolitan Government of Nashville and Davidson County, TN's (metro) approximately $152,900,000 general obligation bonds, series 2005A, and up to $202,025,000 general obligation refunding bonds, series 2005B. The amount of refunding bonds to be sold will depend on market conditions. The bonds are scheduled to sell competitively on April 19. Maturity and redemption have not been finalized.

The 'AA+' rating is based on Nashville's broad and diverse economy, Metro's historically sound financial performance, management's efforts to increase the efficiency of component unit operations, and moderate debt levels. The Negative Rating Outlook reflects Metro's weakened financial performance; the general fund balance declined substantially in fiscal years 2003 and 2004. Officials expect fiscal 2005 to end without the use of fund balance, and none was budgeted. By creating a fiscal 2005 budget that did not depend on the use of reserves, management began to reverse the weakening trend. However, a shortfall is still possible for fiscal 2005, and substantial action will be required for officials to meet their goal of increasing the undesignated general fund balance in fiscal 2006 to 10% of spending. In maintaining the current rating, Fitch assumes this goal will be met.

As a consolidated city/county government, metro benefits from the combination of resources of urban and suburban areas. Nashville has a diversity of economic sectors, including finance, health care, retail, manufacturing, services, and agriculture, and Metro's credit profile is enhanced by the stability of its substantial government and education employment. Economic growth has been sluggish in recent years but appears to be beginning to strengthen. The county's and metropolitan statistical area's (MSA) unemployment rates are well below state and national averages. The number of jobs in the MSA declined slightly from 2000-2002 but grew marginally in 2003. Retail sales levels show recent signs of improvement. Per capita income and retail sales levels are well above the state's and exceed national averages.

Although metro has minimized or eliminated two of its major budgetary risks, subsidies to the Nashville Thermal Transfer Corporation (Thermal) and two metro-owned health care facilities, financial flexibility has decreased since fiscal 2003. Fiscal 2004 ended with a general fund operating deficit of $42.9 million to a total fund balance of $34.9 million, or 5.0% of expenditures and transfers out. The unreserved balance was nearly the same, as no fund balance was appropriated for fiscal 2005. Officials expect fiscal 2005 results to be about break-even, based on a general fund budget that called for a 2% reduction in spending from the fiscal 2004 budget. As was the case in fiscal 2004, property tax revenues are somewhat below budget this year, and expenditures may be slightly over budget, indicating the possibility of another reduction in total reserves. A revaluation is under way and will be incorporated into the fiscal 2006 budget. Officials expect to bring the general fund balance up to 10% of spending during fiscal 2006.

Fitch notes that while the general fund balance is slim for metro's rating level, financial flexibility is enhanced by reserves in other tax-supported funds. Metro maintains a special revenue fund for a reserve for capital equipment equal to 4% of general service district, or countywide, general fund local revenues. The fiscal 2004 unreserved balance was $14.4 million. When added to the unreserved general fund, the balance totals 7.0% of combined general and reserve fund expenditures and transfers out. In addition, Metro generally maintains debt service fund balances in excess of those budgeted for the following year's requirements of close to one year's annual debt service costs. Those combined debt service fund balances in fiscal 2004 totaled $111 million.

Overall debt levels are moderate at 3.4% of market value, and the debt burden should remain fairly constant given manageable future debt plans. A six-year capital improvement plan reflects a comprehensive list of requested projects, which is annually refined to fit into available funding sources.