SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating to Salt Lake City Redevelopment Agency (the agency) bonds:
--$116 million taxable tax increment revenue bonds (Performing Arts Center Project), series 2013 at 'AA'.
The bonds will be sold via negotiation during the week of Sept. 16, 2013. Proceeds will fund land acquisition and construction of the new Utah Performing Arts Center, and will refinance bond anticipation notes issued by the city to fund the project's design costs. The bonds mature serially, April 1, 2016-2038, subject to optional and mandatory sinking fund redemption.
The Rating Outlook is Stable.
The bonds are secured by 40% of property tax increment revenues generated within the Central Business District project area and 75% of property tax increment revenues generated within the Block 70 Community Development project area. This is supplemented by the agency's interlocal agreements with Salt Lake City, Salt Lake County, and the Salt Lake School District whereby they rededicate portions of their tax increment revenue shares back to the agency for repayment of the 2013 bonds.
KEY RATING DRIVERS
CREDIT ENHANCED BY CITY'S MORAL OBLIGATION: The 'AA' bond rating reflects Fitch's evaluation of the bonds' underlying credit characteristics, including the project to be funded and debt service coverage projections, as enhanced by the city's agreement to assist with tax increment revenue shortfalls by considering appropriation of the shortfall amount as a loan to the agency via the annual budget process.
SOLID DEBT SERVICE COVERAGE: Fitch expects tax increment to provide a strong revenue stream; in the event of widespread assessed value (AV) declines, tax increment revenues are protected by automatic adjustments in the certified tax rate. However, pledged revenues are subject to changes in tax rates by the city or its underlying and overlapping taxing units.
NARROW, CONCENTRATED TAX BASE HAS OFFSETTING STRENGTHS: While small with high taxpayer concentration, the project areas are centrally located. As a consequence, they benefit from ongoing capital investment in the city's strong commercial sector, have an extremely high incremental value (IV) to base year ratio, and have thus far experienced minimal property tax appeals.
MINIMAL OPERATIONS RISK: As a capital financing entity which aligns its capital program with available resources, the agency's financial operations pose minimal risk.
MIXED DEBT PROFILE: The agency's direct debt is moderate as measured by debt service coverage, but the overall debt burden on the tax base is quite high. The additional bonds test provides satisfactory protection against overleveraging, and there are no plans to issue further debt.
The rating is sensitive to shifts in fundamental credit characteristics such as the agency's strong financial management practices as a fully integrated part of Salt Lake City, the city's 'AAA' GO bond rating, and maintenance of debt service coverage above the 1.50x additional bonds test. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
SOLID DEBT SERVICE COVERAGE
The agency's base case assumes tax increment growth of 1.1% annually, with maximum annual debt service (MADS) coverage growing from 1.57x in fiscal 2016 to 1.82x in fiscal 2028. As a stress test, applying the most recent tax increment revenue declines to all future years (down 1.6% in FYs 2007 and 2008 combined) would reduce MADS coverage to a just sufficient 1.03x by fiscal 2038 final maturity. Alternatively, a highly unlikely 56.5% decline in AV would be required to drop debt service coverage to 1.00x MADS in fiscal 2014. After current debt rolls off in fiscal 2015, the agency's debt service costs will increase in fiscal 2016 as the agency begins to repay the series 2013 bonds. This higher level of annual debt service cost will remain roughly level through maturity. The additional bonds test requires 1.5x aggregate annual debt service coverage.
CITY'S MORAL OBLIGATION
In the event pledged tax increment revenues are ever insufficient to repay the bonds, the city agrees to assist the agency by requesting city council approval, as part of the annual budget process, to appropriate the shortfall amount as a loan to the agency. The agency would be obligated to repay the city such loans from future tax increment revenues on a subordinate basis. However, appropriation remains discretionary for the city council and the city cannot be sued by bondholders if it fails to appropriate sufficient moneys.
Fitch believes the city (GO bond rating of 'AAA', Rating Outlook Stable) has sufficient financial flexibility and liquidity to readily absorb such an unforeseen funding requirement. The city's ongoing involvement with the Utah Performing Arts Center project, in terms of historical planning and future ownership, indicates a strong incentive to pay. Further, the membership of the agency's board and the city council are the same. This is the city's second moral obligation pledge; an earlier one relates to a much smaller debt ($12.7 million in privately placed Salt Lake City Housing Authority bonds).
NARROW, CONCENTRATED TAX BASE WITH A STRONG COMMERCIAL SECTOR
Taxpayer concentration is high, with the top taxpayer representing 32% of AV, while the top 10 taxpayers collectively represent a very high 64%. The base of tax increment revenue-generating property is also narrow at only 114.4 acres. Nevertheless, the Central Business District and Block 70 Community Development project areas are located in the heart of downtown Salt Lake City and, as a consequence, benefit from considerable ongoing economic development, reflecting the strength of the city's commercial sector. The project areas are supported by stable long-term tenants in their Class A and B office buildings. Tenant diversity also helps offset the high taxpayer concentration.
The Central Business District project area is the agency's most active, with average annual AV and IV growth rates of 3.8% and 5.4% respectively during fiscal years 2006-2013. The IV of $1.5 billion is 11.00x the project area's base year value of $136.9 million. The project area extends to 2040, two years after the series 2013's final maturity. Of this project area's 260 acres, 100 acres are allowed under statutory limitations to generate tax increment. These 100 acres include the project area's most high-profile recent development, the 23-acre mixed-use City Creek development, with a fiscal 2014 AV of approximately $518 million which is likely to increase as all its component buildings become fully built out and occupied.
The 14.4-acre Block 70 Community Development project area, in which the new Utah Performing Arts Center will be located, was established in February 2013 with a base-year AV of $58.8 million and will not generate tax increment until there is new commercial property development. Projected tax increment revenues from an anticipated new office building immediately adjacent to the new Utah Performing Arts Center are not included in the pro forma debt service coverage calculations.
MINIMAL OPERATIONS RISK:
As a capital financing entity which aligns its capital program with available resources, the agency's financial operations pose minimal risk. The agency is entirely funded by tax increment and self-generated revenues from land sales and loans.
The agency receives a portion of the composite tax rate, which is the aggregation of tax rates established by the taxing entities within each of the Central Business District project area (the agency's share is 40%) and the Block 70 Community Development project area (the agency's share is 75%). Tax increment revenues are protected from citywide, countywide, and school district-wide AV declines by automatic adjustments in the certified tax rate under a 2004 Taxing Entity Committee agreement. However, the tax increment revenue stream is somewhat vulnerable to taxing entities lowering their tax rates. In addition, net decreases in the value of specific property parcels located in the project areas could also result in decreased tax increment revenues.
The agency is administratively integrated into Salt Lake City which has a history of conservative financial management and good labor relations. For financial management purposes, the agency is treated as an enterprise department of the city. The Utah Performance Arts Center project has strong mayoral, city council, and public support following extensive planning and community outreach.
MIXED DEBT PROFILE
While the RDA's direct debt is moderate as measured by debt service coverage, it is high at 8.4% of AV. Principal amortization is slow (approximately 36% in 10 years). However, since the agency typically favors pay-as-you-go funding for its capital projects, there are no planned additional parity debt issuances. The agency has no exposure to variable rate debt obligations or swap agreements, its pension and OPEB liabilities are manageable, and there are no material indirect risks, contingent liabilities, or pending litigation.
Additional information is available at 'www.fitchratings.com'.
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