OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following Shelby County, Tennessee (the county) bonds:

--$73.8 million general obligation (GO) refunding bonds 2016 series A.

The bonds are expected to sell on February 3 via negotiated sale. Bonds proceeds will be used to refund certain outstanding county GO debt.

In addition, Fitch affirms the following ratings:

--$1.1 billion county GO bonds at 'AA+';
--$120 million capital outlay extendible municipal commercial paper (EMCP) notes, 2015 series A at 'F1+'.

The Rating Outlook is Stable.

SECURITY
The bonds are general obligations payable from an unlimited property taxing authority of the county.

The notes are direct obligations payable from a pledge of the taxing power of the county. The county covenants impose a tax sufficient to pay principal and interest on the notes when due; the county's taxing power is unlimited.

KEY RATING DRIVERS
DIVERSE ECONOMIC BASE: Shelby County, which includes the city of Memphis, serves as the center for transportation, trade, tourism, and health and education for a sizable multi-state region. Many economic development projects are underway or in the pipeline, which should help boost the local economic recovery.

WEAK DEMOGRAPHIC METRICS: Despite its prominent role in the regional economy, the county continues to exhibit high unemployment. Poverty and wealth levels compare unfavorably to the nation.

STRONG FINANCES AND PRUDENT FISCAL MANAGEMENT: Consistently positive operating margins coupled with conservative financial policies and strong financial management have yielded healthy reserve levels.

STRENGTHENED DEBT PROFILE: Debt ratios have declined to moderate levels and the county has decreased its variable rate debt.

NOTE RATING BASED ON HIGH CREDIT QUALITY: The 'F1+' rating principally reflects a Fitch mapping to the long-term credit quality of the county.

RATING SENSITIVITIES
STABLE DEBT PROFILE: The 'AA+' rating and Stable Outlook indicate Fitch's expectation that the county will maintain a solid debt position and market access, well-managed school expenditures and tax base stability.

CREDIT PROFILE
The county, which has the city of Memphis as the county seat, is located in the extreme southwest corner of the state. With a 2014 population of 938,803, the county is the largest in the state.

STRONG BUDGETARY CONTROL
Strong financial operations are underscored by many years of general fund surpluses, ample liquidity and good budgetary control. Recently strengthened reserve fund policies help to ensure sufficient resources are available to meet unforeseen emergencies; unassigned fund balances as a percent of revenues are to be maintained at 20% to 30% of spending for the general fund and 20% to 30% for the debt service fund.

A $5.4 million (1.4%) operating surplus in fiscal 2015 boosts the unrestricted general fund balance to $108.7 million, a strong 28.7% of general fund expenditures. Property taxes are the dominant revenue source, accounting for approximately two-thirds of general fund revenues, and the county has the ability to raise taxes to offset tax base declines. A modest increase in property tax collections compared to the prior year offset declines in other local taxes and intergovernmental revenues. The county controlled expenditures, despite the merger in fiscal 2014 of the county school district with that of the city of Memphis.

The fiscal 2016 general fund budget is balanced with no use of reserves. Management reports that it is on budget for revenue collections and slightly below budget for expenditures, results consistent with the positive operations that the county historically achieves.

Although the merger could still add risk to the credit, recent performance points to the county's ability to successfully control school expenditures. School funding should remain well-managed in fiscal 2017, even though that will be the first year since the merger when the state's maintenance of effort requirement will apply. Solid expenditure management, high revenue-raising capacity, and fund balance well within the county's high policy range underscore notable financial flexibility.

REGIONAL ECONOMIC IMPORTANCE
Shelby County is the employment center for a three-state, four-county metropolitan statistical area (MSA) encompassing jurisdictions in Arkansas, Mississippi, and Tennessee. The economic base is deep and diverse but mostly recognized for its distribution capabilities. The county is home to a network of road, train, and Mississippi River port facilities, as well as Memphis International Airport, with its massive air cargo operations, Federal Express headquarters, and UPS. The extensive distribution center facilities make the area an attractive location for manufacturing facilities and suppliers.

Strong education and health services sectors aid economic stability. Methodist Health Care along with St. Jude Children's Research Hospital, a premier pediatric cancer research hospital, are in the midst of sizable expansion programs. New construction is prevalent throughout the county, including the $150 million mixed-use One Beale Development.

Despite these strengths, the tax base has seen modest declines in recent years. However, the county's underlying economic strengths and desirability should allow the tax base to achieve reasonable stability.

Socio-economic indicators consistently trail those of the nation, and solid long-term economic growth prospects will not necessarily reverse this trend. County employment declined by 1.8% and 2% in 2013 and 2014, respectively, in contrast to national growth during the period of 1% and 1.7%. Nevertheless, unemployment fell in 2014 to 7.9% from 8.9% the prior year and continued to decline in 2015. The 6.4% unemployment rate in November 2015 was over 1% below that of the prior November. Wealth levels are below those of the nation, while poverty exceeds national indicators.

DEBT LEVELS NOW MID-RANGE
Management has improved the county's debt profile over the past few years, reducing the debt burden while increasing the proportion of fixed rate debt. The current refunding will eliminate an outstanding swap and includes a cash payment to lower outstanding debt.

Debt levels are now what Fitch considers moderate. Subsequent to the refunding, overlapping debt will equal $2,741 per capita, while debt will equal 4.3% of market value. The 10-year amortization rate is rapid at 71.6%. Also subsequent to the current refunding, a moderate 14.5% of the county's direct debt will be variable rate, slightly less than half of the current level.

The county's fiscal 2016 to 2020 capital improvement plan (CIP) identifies $186 million in needs, with the county share of allocations totaling $142 million. The plan does not incorporate any school capital needs, which traditionally have comprised the largest project category. The county plans to remain within its policy of $75 million annually for its annual CIP contribution, comprising debt and pay-as-you-go capital funding.

The county provides pension benefits to its employees through a single-employer defined benefit plan, the Shelby County Retirement System (SCRS). Based on plan assumptions, assets should suffice to ensure future benefit payments to all current plan members. The SCRS reports that assets cover 81.3% of liabilities as of the June 30, 2104 measurement date. With a Fitch-adjusted discount rate of 7%, assets cover 73.3% of liabilities. Contributions for participants are based on actuarial valuations. Although the 2015 employer contribution was slightly below the actuarial level, for many years county contributions exceeded actuarial requirements.

The county fully funds the annual required carrying costs for its other post-employment benefits (OPEB). Total carrying costs, inclusive of debt, pension and OPEB equal a manageable 21.7% of government spending.

ABILITY TO MANAGE UNREMARKETED NOTES

Initial note maturity may not exceed 90 days, and the maturing notes are expected to be funded with rollover notes. If redemption does not occur from rollover notes or funding from the county (either bonds or internal liquidity), the notes are automatically extended to 270 days from the date of issue with a reset interest rate. Such extension is not an event of default. The county has the option to call the extended notes. The notes do not have a tender feature. The county's long-term credit rating of 'AA+' implies access to the capital markets in the event of a remarketing failure.