SAN FRANCISCO--()--Fitch Ratings affirms the following ratings for South Ogden, Utah (the city):
--$7,980,000 sales tax revenue bonds, series 2004, at 'AA-;
--Implied general obligation (GO) bonds, at 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by an irrevocable first lien on the city's 1% sales and use tax revenues levied on the purchase price of nearly all goods sold within city limits.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE; GOOD LEGAL PROTECTIONS: The 'AA-' rating reflects the coverage of debt service provided pledged revenues (2.9x in fiscal 2012) and a good additional bonds test (ABT) of 1.5x maximum annual debt service (MADS). In addition, given the city's reliance on excess sales tax revenues for operations, the rating incorporates the general credit quality of the city.
STABLE FINANCIAL OPERATIONS: Consistent satisfactory financial performance continues to result in stable, adequate general fund reserves.
REBOUNDING ECONOMY: Sales and use tax revenues have recovered and will likely continue rising in fiscal year 2013, helped by the addition of a car dealer.
MODERATE DEBT LEVEL: The moderate overall debt burden is partially mitigated by fast amortization, limited future capital needs, and a closed other post-employment benefit (OPEB) plan.
The current ratings incorporate Fitch's expectation that the city will retain its adequate reserve position as a counterbalance to the small service area and moderate revenue constraints. On the other hand, a significant decline in sales and use tax revenues coupled with materially increased leverage could put downward pressure on the rating.
South Ogden City is located in Weber County, approximately 20 miles north of Salt Lake City. Around 16,760 residents live within the 3.7 square miles of city boundaries.
AMPLE DEBT SERVICE COVERAGE
Sales and use tax revenues rebounded 8% in fiscal year 2012, and current year-to-date results are better than budgeted. Based on year-to-date data, fiscal 2013 collections are likely to be close to the pre-recession peak level achieved in fiscal 2008.
Sales and use tax revenues provide adequate coverage for the city's series 2004, 2006 and 2009 parity bonds. Not counting the telecom exercise taxes which are additionally pledged for the 2009 bonds, the 2012 sales and use tax revenues cover MADS 2.9x. Stressed at 5% annual declines until bond maturity, sales and use tax revenues would still cover annual debt service at 1.6x or above. The very high annual debt service coverage mitigates concerns about the high taxpayer concentration in top sales tax generators of 70%. In addition, the state distributes sales and use tax revenues 50% based on population and 50% based on point of sale, also mitigating the taxpayer concentration risk.
SATISFACTORY FINANCIAL RESULTS, STRONG RESERVES
Utah laws allow property tax rates to be adjusted upward in a declining assessed value (AV) environment. As a result, despite an aggregate 13% decline in AV over the last three years, property tax revenues remained steady, providing stability for about 27% of total revenues.
By contrast, sales and use tax revenues, which account for 30% of total revenues, fell by an aggregate 11% from fiscal years 2008 to 2011, causing total revenues to drop 5% during the same time period. This decline was offset by expenditure cutbacks of a similar magnitude, which resulted in operating surpluses and stable reserves above the 10% minimum level set by the city council.
Boosted by increased sales and use tax revenues, fiscal year 2012 ended with a larger surplus, and an unrestricted general fund balance of $1.9 million, equivalent to 22.6% of spending. Fiscal 2013 is likely to again end with a surplus without further cost cutting measures being required.
The city routinely transfers some of its operating surpluses to the capital projects fund to pay for ongoing maintenance and to maintain additional discretionary reserves. Local government general fund reserve accumulation is limited by state law to 18% of spending. Any amount above the limit is commonly transferred to the capital projects fund. Such funds could be transferred back to the general fund if needed in the future.
HEALTHY ECONOMY, MODERATE DEBT
The city is a mature, primarily residential community with pockets of commercial and retail developments. Largest employers include the IRS, Hill Air Force Base, Convergys, a hospital, and public sector entities. Recent economic developments include the construction of a healthcare facility and the city's new and only major car dealer.
Per capita income and median household income levels are around state and national averages. The city's November 2012 unemployment rate of 5.6% was above the state level (4.9%), but compares favorably to the national rate (7.4%).
Overall debt is moderate at $2,524 per capita, or 3.7% of market value. Direct debt amortization is rapid, at 67% within 10 years. The city has no plans for additional debt, while most of the capital projects are sufficiently funded through operating surpluses or state matching grants.
The city participates in the adequately funded Utah Retirement Systems, making 100% of its annually required contributions, which have risen over the past few years but are likely to remain stable in the future. Other post-employment benefits are no longer offered by the city except for a few employees hired before 1997. Total debt, pension and OPEB carrying costs are affordable at 18% of total governmental spending, excluding capital projects.
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, National Association of Realtors, Underwriter, Bond Counsel
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