Chattanooga's Credit Rating Downgrade: A Shift in Fitch's Evaluation Criteria

In a surprising move, the renowned rating agency Fitch has downgraded the general obligation bonds of Chattanooga, Tennessee, from the coveted AAA rating to AA+. This decision, according to Fitch, is driven by a revised set of evaluation criteria that now places a stronger emphasis on the city's population trends and demographic and economic metrics, which have been assessed as "weak" and "midrange," respectively.

Navigating the Changing Tides of Municipal Credit Ratings

Fitch's New Criteria: A Shift in Focus

The downgrade of Chattanooga's credit rating by Fitch is not a reflection of the city's financial health, but rather a consequence of the rating agency's implementation of its new "U.S. Public Finance Local Government Rating Criteria." This revised framework places a greater emphasis on demographic and economic factors, which have now been deemed as "weak" and "midrange" for Chattanooga.According to Fitch, the city's population trend, as measured by the median of 10-year annual percentage change, is the primary driver behind the downgrade. This assessment, which Fitch has labeled as "weak," has led to the reduction in the city's overall credit rating.

Chattanooga's Response: Maintaining Fiscal Responsibility

Chattanooga Mayor Tim Kelly has responded to the downgrade with a measured approach, acknowledging that the city's finances remain in excellent shape. In a statement, the mayor noted that "nothing about the city's finances has changed, except Fitch has revised its rules." He further emphasized that Chattanooga is one of more than 500 local governments expected to be affected by Fitch's new criteria.Despite the downgrade, the city remains highly rated, with an AA+ from Fitch and a AAA rating from S&P. Mayor Kelly attributed this to "years of responsible, conservative budgeting," which have kept the city's government in a strong financial position.

The Impact on Chattanooga's Bonds and Future Borrowing

The downgrade of Chattanooga's general obligation bonds from AAA to AA+ by Fitch is not expected to have a significant impact on the city's ability to issue bonds or secure financing. In fact, the Chattanooga-Hamilton County Sports Authority's bonds for the Chattanooga Lookouts stadium project have been awarded a AAA rating by S&P, indicating that the city's creditworthiness remains robust.This development serves as a reminder that credit ratings are not static and can be subject to changes in evaluation criteria. As municipalities navigate the evolving landscape of municipal finance, it is crucial for them to maintain a strong focus on fiscal responsibility and prudent financial management, as Chattanooga has demonstrated.

Adapting to the New Normal: Chattanooga's Resilience

The downgrade of Chattanooga's credit rating by Fitch is a testament to the changing dynamics in the municipal bond market. While the city's financial fundamentals remain strong, the rating agency's shift in focus has resulted in a lower rating.However, Chattanooga's response to this challenge has been one of resilience and adaptability. By maintaining a conservative approach to budgeting and financial management, the city has positioned itself to weather this change in credit assessment and continue to access the capital markets on favorable terms.As municipalities across the country grapple with the implications of evolving rating criteria, Chattanooga's experience serves as a model for how local governments can proactively manage their finances and adapt to the new normal in the municipal bond market.