Commentaries

Atlanta: A City Improved?

By: niche / September 17th, 2012

Clients have asked whether or not the City of Atlanta has seen improvements in its financial operations. Overall, Asset Preservation Advisors (APA) acknowledges the improvements made to the City’s financial operations. However, challenges still face the City of Atlanta. This white paper examines the various improvements made and addresses those challenges remaining with regards to Atlanta’s financial picture. APA, based in Atlanta, notes that in June 2012 the City’s rating outlook was changed by Moody’s to stable from negative. This rating change follows a March 2012 S&P outlook change of stable from negative as well.

The Atlanta Economy

The City of Atlanta has a large and fairly diverse economy and is considered one of the leading economies in the nation in education, trade and transportation. The center of the transportation area is Hartsfield Airport, which continues to be the busiest airport in the world as measured by passenger traffic, a distinction it has held since 2000.

Business and trade remains a positive presence in Atlanta. According to Moody’s, Atlanta ranked 3rd in 2011 in terms of Fortune 500 companies’ headquarters with 13 located in the area. Major companies located in Atlanta’s MSA include Home Depot, UPS, Coca-Cola, and Delta. Other key industries located in Atlanta include television and film, with Turner Broadcasting, a Time-Warner subsidiary, being a major employer.

An additional positive factor for the local economy is that Atlanta is home to many colleges and universities including Emory, Georgia State and an urban campus of the University of Georgia. Atlanta also has a significant regional concentration of federal agencies including the Center for Disease Control. It boasts several major hospital and healthcare systems as well.

As a result of these factors, the Atlanta economy continues to show improvement as evidenced by the declining unemployment rate. Data provided from the Bureau of Labor Statistics through Merritt Research Credit Scope shows the July 2012 unemployment rate for the City at 11.9%, below the July 2011 rate of 12.8% and a July 2010 rate of 13.1%.

There are challenges however. The City has a significant high foreclosure rate which continues to limit its property tax base growth. According to Moody’s, the Atlanta MSA’s foreclosure rate was the second highest in the country as of May 2012, at one in 244 homes in foreclosure. National wealth indicators are below average. The City’s per capita income of $35,453 was below the Fulton county level of $37,211 yet above the state level of $25,134 and the national level of $27,334. Median household income of $45,171 was below Fulton County’s of $56,709, the State level of $49,347 and national of $51,914 in 2010. Poverty rates in the City remain high at 22.6% in 2010 compared to 15.3% for Fulton County, 15.7% for the state, and 13.8% for the nation. Poverty rates have come down slightly from 27% in 2005.

Major transportation issues strain the City’s image and growth prospects, with many Atlanta residents spending a significant amount of time on congested roads. With the recent failure of a proposed sales tax to fund transportation improvements, the city and surrounding areas may have a difficult time competing with other less congested cities.

 

Financial Operations

Despite a sluggish local and national economy, APA recognizes that the current City Administration has improved Atlanta’s financial operations. Data provided by Merritt Research through Credit Scope shows General Fund surpluses in 2010 and 2011 after significant deficits in the three previous fiscal years (2007 through 2009). The City accomplished the improvements by reducing expenditures and increasing fees and other non-ad valorem revenues. The result was an improvement in the General Fund balance to $94.3 million as of Fiscal year 2011, a sound 18.4% of expenses. This measure was still below the Merritt median as a percentage of expenses of 29% for AA-rated cities and 19% for A-rated cities. However, this was a increase from a very low $7.4 million General Fund balance or a very limited 1.6% of expenses in fiscal 2009.

As for more recent financial operations, the fiscal 2012 budget was balanced and was expected to avoid tapping any appropriations from the General Fund. The City expects expenditure savings in nearly every line item in the General Fund due to various budgeted contingencies, conservative spending in key areas and expense reductions. As a result, the City is expected to end the year with roughly a General Fund balance of $134 million, or approximately 23% of revenues. Another positive for the City was an amendment to the City’s Charter in 2012 to establish a GASB 54 fund balance policy establishing a minimum rate of 15% for the unrestricted fund balance.

One concern is that the City’s liquidity remains low for its rating agencies’ category as evidenced by the 53 days cash on hand as of FYE2011 compared to 91 days cash on hand for AA-rated cities and 46 days for A-rated cities. In addition, Moody’s states that inter-fund receivables from the Sanitation and Emergency Telephone System (ETS) may limit the City’s General Fund liquidity in the medium term.

 

Atlanta’s Debt

APA would classify the City’s tax-backed debt position as above average. In 2011, net direct debt was a 1.7% of Full Value. This compares to the Merritt Research median of just below 1% for AA-rated cities. Positively, the City does not plan to issue any substantial additional debt in the near term. In addition, all of the City’s outstanding general obligation debt is at fixed rates.

The City does have a significant pension liability and while funding ratios have improved, the city’s pension systems are still well underfunded. Atlanta has three defined benefit pension systems and one defined contribution system: One system for general employees; one for police officers and one for firefighters. Moody’s reports that prior to November 2011, all of the City’s permanent employees were eligible to participate in the “defined benefit” systems. However, the city changed these plans to require all new general (non-uniform) employees of the city to participate in a hybrid defined benefit plan with a mandatory defined contribution component. Additionally, all employees hired before September 1, 2011 were required to pay a 5% increase in their mandatory contribution.

In a Moody’s Investors Service Report, the July 1, 2010 general employees’ plan had a funding ratio of 53% and an unfunded actuarial accrued liability of $747 million. As of January 2011, the police and firefighter funds were funded at 66% and 65.8% respectively, and had a combined unfunded actuarial accrued liability of $609.3 million according to Moody’s. Officials estimated that the recent plan changes could save the City approximately $277 million over the next 10 years, thus improving the plans’ funded positions over the medium-term.

 

Disclosures:

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Asset Preservation Advisors, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

 

APA is a registered investment advisor. More information about the advisor including its investment strategies and objectives can be obtained by visiting www.assetpreservationadvisors.com. A copy of APA’s disclosure statement (Part 2 of Form ADV) is available without charge upon request. Our Form ADV contains information regarding our Firm’s business practices and the backgrounds of our key personnel. Please contact APA at 404-261-1333 if you would like to receive this information. APA-12-188