Fitch Rates Salt Lake County, Utah's GOs 'AAA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has rated Salt Lake County, Utah's (the county) general obligation bonds (GOs) 'AAA' as noted below:

--$25 million GOs series 2013.

The bonds will sell via competitive sale on or about Oct. 30. Proceeds will fund the acquisition and improvement of open space, parks, and community trails.

In addition, Fitch's affirms the following ratings:

--$269 million GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited property tax levied on all taxable property in the county.

KEY RATING DRIVERS

TAX HIKE BOOSTS FINANCES: The county prudently approved a property tax levy hike, which has moved the general fund into a structural surplus position after two years of deficits. However, out-year inflationary expenditure pressures could outstrip projected revenue gains absent future property tax rate hikes.

SOLID AND DIVERSE ECONOMY: The regional economy is large, diverse, and well-positioned for long-term growth. Unemployment is very low, home prices are recovering at a solid pace after recessionary losses, and large-scale private and governmental capital investments are continuing.

STRONG DEBT PROFILE: Debt levels are low and principal amortization is rapid. Capital needs are limited, and the county's OPEB and pension cost growth have been reduced as the result of recent years' state and local benefit reforms.

PRUDENT MANAGEMENT PRACTICES: Financial management policies are sound, as demonstrated by conservative budgeting practices, significant use of pay-as-you-go capital financing, and a prudent minimum reserve level that has been regularly exceeded.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's strong economy, debt profile, and financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

STRONG ECONOMY WELL-POSITIONED FOR LONG-TERM EXPANSION

Salt Lake County encompasses a significant portion of the state's total population and economic activity. Local economic indicators are strong overall, with July unemployment falling to just 4.3% from 5.8% a year ago. Household income and poverty rates are moderately better than national averages.

The county is well-positioned for continued population and economic growth given ample developable land, substantial capital investments, and a positive business climate. Fiscal 2013 assessed valuation (AV) levels increased a moderate 2.9%, ending a multi-year tax-base contraction caused by the housing-led recession. However, the county recently reached a settlement with its top taxpayer, Kennecott Copper, resulting in a substantial $1.7 billion (42.5%) reduction of the taxpayer's AV. AV gained just 0.5% after adjusting for the appeal.

The county typically adopts its certified tax rate, which is the tax rate required to achieve the prior year's tax revenue, plus new growth. This approach stabilizes revenues in a declining AV environment, but limits upside revenue potential in an expansion. As a result, Kennecott's appeal will not cause a reduction of the county's property tax revenues. Rather, the remainder of the tax base will absorb a relatively minor tax rate increase to offset the appeal.

SOUND FINANCIAL POSITION SUPPORTED BY TAX HIKE

The county's financial position historically has been strong, but deteriorated somewhat over the past two years owing to structural deficits. In fiscal 2013 the county prudently approved its first tax levy hike in over 10 years, thus moving the general fund into a position of structural surplus. The county tax rate increases 16% beginning in fiscal 2013 and is expected to raise $31 million annually. The total tax rate (including other overlapping taxing entities) increases by just 3.2%. In addition to closing the county's structural deficit, proceeds from the tax hike are proposed to be spent on the restoration of employee wage reductions, deferred maintenance, OPEB pre-funding, and essential requests from the county's various departments.

Fiscal 2013 general fund operations are projected to produce a $7 million surplus, well exceeding a conservatively budgeted draw-down of nearly $1 million. Fiscal 2012 audited operations produced a $5.4 million deficit, lowering the total and unrestricted general fund balances to still sound levels of $44.9 million (17% of expenditures and transfers out) and $40.9 million (15.5%), respectively. The county had conservatively budgeted for a much larger $16.8 million deficit.

The county's largest source of revenues derives from property taxes, which, as mentioned above, are levied at the same level every year plus new growth. Because this revenue source is not indexed to inflation, the county's structural surplus may decline moving forward if expenditures grow at a higher rate than total revenues. As a result, the county's long-term financial position may be susceptible to the continued willingness of public officials to raise the tax levy from time to time to offset inflationary pressures.

STRONG DEBT PROFILE

The county's total debt burden is low at $1,474 per capita and 1.5% of market value. Principal amortizes rapidly, with 44% and 70% of debt retiring in five and 10 years, respectively. These strong debt metrics stem in part from the county's significant use of pay-as-you-go capital financing.

The county's unfunded OPEB liability equals $115.7 million, or 0.16% of AV. Historically the county has funded OPEB on a pay-as-you-go basis. This year the county discontinued OPEB benefits for future employees and may establish and fund an irrevocable trust, beginning with a $1.9 million contribution. Management has set up an OPEB review policy moving forward, which will consider future contribution levels after an actuarial report is made available in late 2013.

The county participates in the state's Utah Retirement System (URS). In recent years the state has implemented material pension reforms that will slow pension funding growth going forward. Recessionary investment losses lowered the public employees' noncontributory system's (the largest of the county's systems) funded ratio to a somewhat weak 78.4%, however, resulting in rising contribution rates. Fitch assumes a standardized 7% investment return rate (the system assumes 7.5%), which lowers the funded ratio to 74.3%. The system uses a five-year smoothing period, so recent years' investment losses have largely been incorporated into fiscal 2013 contribution rates. Management expects rates to stabilize moving forward.

PRUDENT MANAGEMENT PRACTICES

Fitch views favorably the county's prudent financial management policies and recent years' actions to offset recessionary pressures. Management proactively cut expenditures early in the recession and, although delayed until 2013, increased property tax rates. Financial management policies include a minimum 10% unassigned general fund balance that has regularly been exceeded. Long-term debt is reviewed by a senior committee, and by policy the county uses pay-as-you-go capital financing as its first alternative. State and county reforms to employee benefits will materially slow related expenditure growth in the future.

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, and Zillow.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805083

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Contacts

Fitch Ratings
Primary Analyst:
Scott Monroe, +1-415-732-5618
Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst:
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Scott Monroe, +1-415-732-5618
Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst:
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com