Hamilton County Finance Director Louis Wright

Chattanooga and Hamilton County are facing possible changes to their bond ratings as uncertainty in the markets leaves local government leaders questioning what will happen next.

Hamilton County's AAA bond rating with all three major ratings agencies is higher than the federal government's -- at least for now.

Chattanooga will face a ratings review in a matter of months that could alter its own AA+ rating when it seeks to issue new bonds.

Ratings from the three major credit agencies -- Fitch, Standard & Poor's and Moody's -- can signal the agencies' confidence in a government's ability to pay back the debt on bond issues. The rating can affect the interest rate the government will pay on its debt.

Hamilton County

County leaders have prided themselves in achieving AAA status, even making drastic budget cuts this summer to maintain a budget reserve of at least three months of operating expenses to preserve it. S&P has affirmed the county's AAA status.

Nonetheless, on Aug. 4, Moody's signaled a possible downgrade by issuing a negative outlook, said David Jacobson, Moody's spokesman. The agency also has given the federal government and the state of Tennessee a negative outlook. If the state's rating drops, the county's could, too.

"They've said they are going to call us in the next two to three weeks," said County Finance Director Louis Wright. "They're tying us to the state."

Jacobson said Moody's constantly is evaluating governments and is considering Hamilton County separately from the state and federal governments.

County Commission Chairman Larry Henry said the negative outlook is "no reflection at all on what we're doing here in the county."

Commissioner Warren Mackey, chairman of the Finance Committee, said his only concern is that a possible downgrade could affect the county's interest rate when it inevitably must borrow to build new schools in the eastern part of the county to accommodate growth.

Wright refused to speculate about the effects of a possible downgrade on the county's future borrowing. He said the market reaction to S&P's downgrade of the federal government -- an immediate interest rate drop -- shows that the situation is unpredictable.

Chattanooga

Daisy Madison, CFO for the city of Chattanooga

Daisy Madison, the city's chief finance officer, said this week she is "cautiously optimistic" the city will not face any downgrade in bond ratings. Instead, the city plans to argue to S&P and Fitch, the two agencies that rate the city, that it should receive an upgrade to AAA.

The ratings agencies have the discretion to conduct a review of finances at any time, she said, but the city plans to have a bond issue for the last two fiscal years' capital budgets sometime around October or November, and that will trigger a review.

There are negligible differences between a AA+ rating compared to a AAA rating, Madison said. But a recent analysis undertaken by Madison found the city could save $2 million over a 30-year period if it had AAA status, she said.

A $1 million debt would save the city about $1,000 a year under AAA status and go down as the principle is paid down, she said, but savings are savings.

"I'll take it," Madison said.

The arguments the city will make for the AAA status include raising property taxes when necessary and addressing city retiree pensions by cutting them, she said. The city also hiked water quality fees and all other city fees, such as permits and park facility rental rates.

Such tough changes show Mayor Ron Littlefield and the City Council are willing to take the steps needed to keep the city's financial ship afloat, Madison said.

"I think the ratings agencies will agree," she said. "It shows [the council and mayor] are willing to step up and do the necessary things."

Council Chairwoman Pam Ladd said she had no concerns about a downgrade because the city is independent with its own charter and not tied to the state or federal government. She also thinks the city has a valid argument for an upgrade since it has shown fiscal responsibility, she said.

"We've did the tough choices," she said. "We passed the property tax, the water quality fee and we passed other fees."

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