SAN FRANCISCO--()--Fitch Ratings has assigned the following rating to Salt Lake City, Utah's general obligation (GO) refunding bonds:
--$5.9 million, series 2013A rated 'AAA'.
The bonds will be sold via negotiation on March 6, 2013. Bond proceeds will be used to refund the city's callable outstanding GO bonds, series 2004A. The series 2013A bonds mature serially on June 15, 2013-2024 and are not subject to redemption prior to maturity.
In addition, Fitch has affirmed the following ratings:
--$164 million GO bonds at 'AAA';
--$38.6 million sales tax revenue refunding bonds, series 2004 and 2005A at 'AA+'.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited pledge of ad valorem tax on all property within the city. The sales tax revenue refunding bonds are secured by a first lien on the city's 1% sales and use tax as well as additional taxes pledged pursuant to a supplemental trust indenture executed in 2012.
KEY RATING DRIVERS
DIVERSE AND HEALTHY ECONOMY: Salt Lake City is a cultural and economic center for much of Utah's population and benefits from a diverse commercial sector that is performing well, a stabilizing property market with considerable new development underway, and low unemployment.
ONGOING STABLE OPERATIONS: The city maintained stable operations throughout the recent recession and continues to support a healthy unrestricted general fund balance (11% of spending in fiscal 2012) while regularly committing 7% of general fund revenues to capital projects.
SUBSTANTIAL FINANCIAL FLEXIBILITY: In an emergency, the city could access considerable borrowable resources to support the general fund.
STEADY PROPERTY TAX REVENUES: Property tax accounts for one-third of general fund revenues and provides a steady source of funding. State law provides for automatic adjustments of tax rates when assessments rise or fall for existing properties, insulating revenues from price volatility in the real estate market.
RECOVERY IN SALES TAXES: Following substantial sales and use tax revenue declines during fiscal years 2009 and 2010, collections improved by 5% in fiscal 2011 and 7% in fiscal 2012, with ongoing improvement likely given strong year-to-date results.
STRONG DEBT POSITION: Direct and overlapping debt levels are low, and amortization is rapid.
HIGH COVERAGE LEVELS: The city's outstanding sales tax revenue bonds were strengthened in fiscal 2012 with the pledge of additional franchise and utility tax revenues, and they retain very high coverage levels under all stress scenarios.
STABLE CREDIT CHARACTERISTICS: While 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 highly unlikely.
Salt Lake City is Utah's capital and the economic and cultural center for the state. The city's economy is diverse, with a stable roster of major employers, and is coming out of the recent recession strongly, reflected in very low unemployment (4.5% in November 2012). The city's property market appears to be stabilizing after declines in fiscal years 2010 and 2011, and future growth prospects are good in light of property developments currently underway or due to commence shortly. However, the city's socio-economic characteristics are somewhat suppressed in comparison to state and national averages, reflecting the state's most urbanized central city population.
ECONOMIC GROWTH RETURNS
Economic indicators suggest Salt Lake City experienced a more shallow recession than many regions nationally, with a peak annual unemployment rate of 8.6%, cumulative home value declines of 13%, and relatively small declines in incomes and output. After two years of sales and use tax decreases, the city saw strong growth in this economically sensitive revenue in fiscal years 2011 and 2012, and expects continued recovery in fiscal 2013. After three years of employment declines, the city experienced 2.4% employment growth in fiscal 2012 and is seeing continued employment growth in fiscal 2013 across most sectors.
The city has traditionally had strong finances and limited debt, as reflected in its high rating levels. The city addressed the recent economic downturn largely through reductions to employee compensation and benefits and modest use of fund balance. After slight reductions to fund balance in fiscal years 2008 and 2009, the city achieved surpluses in fiscal years 2010 and 2011 which it added to fund balance while also maintaining its regular commitment of 7% of general fund revenues to pay-as-you-go capital needs.
In fiscal 2012, the city's policy decision to again make this 7% transfer resulted in a small net operating deficit after transfers of $1.3 million. However, the city's unrestricted general fund balance remained solid at $21.9 million or 11% of spending. The ongoing transfers to capital projects provide the city with additional financial flexibility in the event of an emergency, as does the city's ability to access approximately $146 million in other funds' cash balances in the unlikely event that such borrowing becomes necessary.
VERY STRONG SALES TAX BOND DEBT SERVICE COVERAGE
Pledged sales and use tax and franchise tax revenues in fiscal 2012 covered maximum annual debt service (MADS) 8.6x. Coverage is assumed to increase under a base scenario that assumes modest revenue growth through maturity. Coverage remains strong at 7.6x MADS under a stress scenario that considers the effects of three consecutive years of 5% declines in pledged revenues, followed by no growth through maturity. Although existing coverage levels will decline somewhat upon the issuance of future parity debt, renewed economic growth is likely to ensure continued strong coverage.
LOW DEBT LEVELS
Debt levels remain low at $2,622 per capita and 2.1% of market value including overlapping debt. Amortization is rapid, with approximately 70% of principle and interest repaid in 10 years. The city participates in four state-sponsored pension plans and is likely to face higher contribution requirements over the next several years to offset recent investment losses. Retiree health benefits are funded on a pay-as-you-go basis, resulting in a growing other post-employment benefits (OPEB) liability for the city which it is planning to address within the context of health care reform.
In fiscal 2012, debt service, pension ARC, and OPEB pay-go represented a manageable 20.4% of total governmental fund spending and transfers out, less capital.
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, 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