SAN FRANCISCO--()--Fitch Ratings affirms the following Layton, Utah sales tax revenue bond rating:
--$0.7 million series 2003 refunding bonds at 'AA'.
Fitch also affirms the city's implied ULTGO bond rating of 'AA+'.
The Rating Outlook is Stable.
The sales tax revenue bonds are secured by an irrevocable first lien on 100% of the city's 1% sales and use tax revenues.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: The City of Layton's financial position remains solid, with a history of typically strong general fund balances, adequate general fund liquidity, and aggressive pay-as-you-go funding of capital improvements.
STRONG SALES AND USE TAX RECEIPTS: Although volatile and generated by a highly concentrated tax base, the city's sales and use taxes remain an important and growing general fund revenue source. They continue to provide excellent debt service coverage for the city's outstanding sales tax revenue and easily support the city's mandatory annual contributions to the Utah Telecommunication Open Infrastructure Agency (UTOPIA).
MANAGEABLE TOTAL DEBT BURDEN: The city's low bonded indebtedness and its lack of other post-employment benefit liabilities, combined with rising pension costs and a significant mandatory annual support contribution to UTOPIA, resulted in moderate carrying costs of 23% of fiscal 2011 general and debt service fund spending.
IMPROVING LOCAL ECONOMY: Although the city has experienced moderate assessed valuation declines over the last three years, the local property market is showing signs of increased development. Also, the local unemployment rate is declining, and the city's socioeconomic characteristics largely remain above-average.
In addition to being the largest city in Davis County with a population of approximately 67,000, Layton benefits from being located along the I-15 corridor between the employment hubs of Salt Lake City (25 miles to the south) and Ogden City (15 miles to the north).
SOLID FINANCIAL POSITION
The 'AA+' implied ULTGO bond rating reflects the city's solid general fund performance, characterized by typically strong general fund balances, adequate liquidity, pay-as-you-go capital funding, and an affordable debt burden. The city has maintained this level of performance despite local economic and property market softening during the last economic downturn. The 'AA' rating for the series 2003 sales tax revenue refunding bonds reflects excellent debt service coverage, which holds up well to extreme stress scenarios, an adequate additional bonds test, and high sales taxpayer concentration. The top 10 taxpayers generate approximately 33% of sales and use tax revenues. While sales and use tax revenues used to represent more than half of the city's total revenues, this revenue concentration has declined recently with sales and use tax revenues representing approximately 38% of the total in fiscal 2011.
The city's financial operations are solid, with general fund expenditures kept comfortably below general fund revenues, thereby generating operating surpluses which can be used to fund pay-as-you-go capital expenditures. Downward revenue pressure in fiscal 2009, combined with a larger than usual transfer out to the capital projects fund, resulted in an uncommonly low unreserved general fund balance of $2.1 million or 6.2% of spending. The city moved swiftly to restore its unrestricted general fund balance in fiscal 2010, primarily by transferring much less to the capital projects fund. By year-end the total was $4.7 million, or 18.4% of spending, in line with the maximum permitted by the state. The city reported similar results in fiscal 2011, with the unrestricted general fund balance at year-end of $5 million, or 18% of spending. The city anticipates maintaining its unrestricted general fund balance at 18% of spending for both fiscal years 2012 and 2013.
STRONG SALES AND USE TAX RECEIPTS
The series 2003 sales tax revenue bonds are secured by a first lien on 100% of the city's 1% sales and use tax levy. The tax is levied and collected by the state and apportioned to cities based 50% on population and 50% on the point of sale. With fiscal 2012 sales and use tax receipts of $11.3 million, annual debt service (ADS) coverage was excellent at more than 14.0 times (x). Sales tax revenues would have to drop approximately 93% from fiscal 2012 levels for ADS to equal 1.0x. Final maturity of the series 2003 bonds occurs in fiscal 2014.
At the current level of sales and use tax receipts, the city reports no difficulty in meeting its mandatory annual obligation towards the Utah Telecommunications Open Infrastructure Agency ($2.1 million in fiscal 2012). The city's contribution can increase by no more than 2% per year, up to a maximum annual cap of $3.7 million in fiscal 2040.
IMPROVING LOCAL ECONOMY
As a predominantly bedroom community, the city's population growth has been moderate, fuelled by relatively affordable housing, significant vacant space for development, and access to key Wasatch Front employment centers. Hill Air Force Base, adjacent to the city's northern border, is the largest county employer with approximately 13,000 civilian employees. The city's median household income is higher than state and national levels, and the individual poverty rate is considerably lower. Per capita money income is somewhat below national levels, likely due to larger family sizes. The unemployment rate of 5.8% in August 2012 is in line with the state (5.6%), lower than the nation (8.2%), and represents a significant improvement over the 6.6% local unemployment rate 12 months earlier. However, some of this improvement could be due to the 12.9% labor force contraction the occurred in fiscal years 2010 and 2011.
The city experienced a moderate 5.9% taxable assessed valuation decline over the three years 2010-2012. Fitch notes this decline should be arrested by positive countervailing trends in the local property market, most notably rising median house prices, increased issuance of single family and multifamily construction permits, fewer foreclosures, and reduced commercial property vacancies.
AFFORDABLE DEBT BURDEN
Overall debt levels are low at $1,601 per capita or 2.2% of market valuation, reflective of both the city's aggressive pay-as-you-go financing of its capital needs and fast debt amortization. The city pays its actuarially determined annual pension contributions, which rise significantly in fiscal 2013 largely due to a 17% state retirement system rate increase. The city no longer offers other post-employment benefits. Its fiscal 2011 contribution to UTOPIA was approximately $2.1 million. In combination, the city's debt, pension, 401(k), and UTOPIA contributions represented manageable carrying costs of 23% of the city's fiscal 2011 general and debt service fund spending.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria