OREANDA-NEWS. Fitch Ratings has affirmed its 'AA' rating on the following outstanding general obligation (GO) bonds of the city of Johnson City, Tennessee (the city):

--$56.3 million outstanding GO bonds.

In addition, Fitch affirms the following ratings:

Johnson City Public Building Authority
--$9.8 million public facilities refunding bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The city's GO bonds are general obligations of the city backed by its full faith and credit and unlimited taxing power.

The Johnson City Public Building Authority bonds are backed by the full faith and credit and unlimited taxing power of the city under a loan agreement with the authority.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: Conservative financial management practices have resulted in the maintenance of healthy reserves, despite recent draw-downs. Revenue trends have been positive, largely keeping pace with expenditures.

STABLE ECONOMIC PROFILE: A significant health and higher education presence adds stability to the local economy. City wealth levels are below average, though unemployment rates have generally been close to or lower than state and national rates. Taxable assessed value (TAV) has shown recent growth.

MODERATE OVERALL DEBT LEVELS: Overall debt levels remain moderate. Total carrying costs, including debt, pension, and other post-employment benefits (OPEB) are manageable.

RATING SENSITIVITIES

FISCAL STABILITY: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the near term.

CREDIT PROFILE

Johnson City is located principally in Washington County in northeastern Tennessee near Kingsport and Bristol, known collectively as the tri-cities area. The city had a 2014 population of 65,813 with above-average population growth in recent years, driven largely by economic developments in healthcare and education.

STABLE LOCAL ECONOMY

The city's education and health services sectors anchor the local economy. Mountain States Health Alliance (MSHA), a regional medical system, is the city's largest employer (about 2,445 employees), followed by East Tennessee State University (2,370) and the James H. Quillen V.A. Medical Center (2,188). MSHA is proposing to merge with Wellmont Health System, based in Kingsport, TN. The city has indicated that it does not expect any negative impact from the merger. East Tennessee State University serves a total enrollment of about 15,000 including medical and pharmaceutical students, and has partnered with the city in the planned construction of a $30 million performing arts center.

The city's tax base is not concentrated; the largest taxpayer, Glimcher Mall is just 1.2% of TAV and the top ten is a moderate 7.4%. TAV performance has generally been flat in recent years, with a modest 1.2% gain in fiscal 2016 bringing the total to $1.83 billion. Continued growth is expected due to ongoing economic development including business expansions in the city's downtown area. City wealth and per capita income levels remain below the national average. The city's unemployment rate declined to 4.8% in January 2016 from 7.0% a year prior, just below comparable state (4.9%) and national (5.3%) averages.

SOUND FINANCIAL PERFORMANCE

Maintenance of a solid financial profile, including strong reserve levels, has continued. Revenues have largely kept pace with expenditures in recent years, although some use of reserves for capital projects has occurred. In fiscal 2014, the city transferred $2.4 million in fund balance to support the city's golf fund. While some general fund support of the golf fund will continue ($586,000 in fiscal 2015), no additional significant transfers are expected.

At the end of fiscal 2015, the unrestricted general fund balance plus rainy day reserves totalled $18.8 million or a solid 24% of spending. The city has historically maintained reserves in excess of its policy level of 16%. The fiscal 2016 budget is balanced and assumes good revenue growth (about 6% vs. fiscal 2015), due in large part to a property tax increase and continued growth in sales taxes. Total expenditures are budgeted to increase by about 5% vs. fiscal 2015, driven largely by capital spending and a 3% pay increase. A fiscal 2016 year-end surplus of about $466,000 was budgeted. The city expects the surplus will be larger, as current projections show both revenues and expenditures outperforming budget.

The city implemented a 25-cent property tax increase for fiscal 2016, projected to increase revenues by more than $4 million; the increase will provide increased funding for street repairs, school operations, capital projects and equipment. Prior to this increase, the city's tax rate had remained unchanged for more than 10 years. Even with the increase, the city's rate remains the lowest for cities in the tri-cities region.

MODERATE DEBT, MANAGEABLE FUTURE NEEDS

The city's overall net debt ratios are moderate at $3,372 per capita or 3.8% of fiscal 2015 market value; a recent $11 million GO issuance will not materially alter these ratios. Amortization is above average at about 67% within 10 years, and debt service as a percentage of spending is affordable at about 9% of fiscal 2015 governmental spending. As of fiscal 2015, variable rate bonds represented about 15% of overall GO debt (25% of the total excluding self-supporting debt), which Fitch considers moderate.

Future capital needs are manageable. The city's fiscal 2016-2020 capital improvement plan totals $212 million and includes about $97 million in debt issuance. About $41 million of the projected debt issuance is to be paid out of the water/sewer fund.

MANAGEABLE PENSION AND OPEB COSTS

General city employees hired prior to fiscal 2011 and teachers are covered, respectively, by agent multi-employer and cost sharing multi-employer plans provided through the Tennessee Consolidated Retirement System (TCRS). For general employees, the city withdrew from TCRS in fiscal 2011 and switched to a defined contribution plan, which has reduced annual costs.

The city makes annual state-determined payments to the TCRS plans equal to the annual required contributions. These contributions totalled about 6% of governmental spending in fiscal 2015. The plans' net pension liability totalled $25 million (less than 1% of market value) as of June 30, 2014, based on a Fitch-adjusted 7% investment rate of return. The city's OPEB liability ($35 million or less than 1% of market value) is funded on a pay-as-you-go basis. Total carrying costs for debt service, pension and OPEB are a manageable at about 17% of fiscal 2015 governmental spending.