Fitch Affirms Pleasant Grove City, UT's Excise Tax Revs at 'A+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed Pleasant Grove City, Utah's (the city) excise tax revenue bonds at 'A+' as listed below:

--$3.2 million series 2008.

The Rating Outlook is Stable.

In addition, Fitch affirms and simultaneously withdraws the city's 'AA' implied general obligation bond rating as it is no longer analytically relevant.

SECURITY

The bonds are secured by a first lien pledge on Class C road revenues. The majority of such revenues historically have been composed of gas taxes, though other sources include taxes and fees on highway use, safety inspections, vehicle registrations, and others. Distributions of the revenues are based 50% on population and 50% on Class B and C road mileage. There is a cash-funded debt service reserve funded to the IRS maximum.

KEY RATING DRIVERS

SATISFACTORY DEBT SERVICE COVERAGE: The 'A+' rating reflects the relatively narrow nature of the tax, a moderate degree of historical revenue volatility, as well as just adequate debt service coverage levels and additional bonds test.

DIVERSE REVENUE BASE: The aforementioned security weaknesses are somewhat mitigated by the breadth of the revenue base. Revenues are collected state-wide and distributed based on municipalities' road mileage and population.

NO FURTHER LEVERAGING CONTEMPLATED: Despite the city's significant backlog of road maintenance, management has no plans for further leveraging its Class C road revenues. Management plans to increase pay-as-you-go road spending upon final maturity of the bonds in fiscal 2018.

STRONG ECONOMIC RECOVERY: The city's economy is in the midst of an impressive economic recovery, with very low and falling unemployment, robust employment growth, and a stabilizing housing market.

SOLID FINANCIAL OPERATIONS: Revenues are well diversified, the general fund has produced three consecutive years of structural surpluses, budgets tend to be conservative, and both fund balances and liquidity are solid. However, revenues fell significantly during the recession causing two years of significant deficits.

IMPLIED ULTGO WITHDRAWAL: The 'AA' implied GO rating has been withdrawn due to the defeasance of the city's Fitch-rated sales tax revenue bonds, whose rating was capped by the implied GO per Fitch's criteria.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: The rating may shift should future or anticipated debt service coverage vary materially and sustainably from recent levels. The Stable Outlook reflects Fitch's base case assumption that coverage will not vary materially and sustainably.

CREDIT PROFILE

Pleasant Grove encompasses nine square miles with a population of 33,500 residents in Utah County. The city's economy benefits from its proximity to the large and expanding employment centers of Salt Lake City. The city is located in the Provo-Orem regional employment market, which is somewhat concentrated in the health care and education sectors due to the presence of two large universities and a major medical center.

VERY STRONG EMPLOYMENT MARKET

November unemployment was quite low at 3.3%, well below the nation's 6.6% rate and on par with the state and region. Year-over-year employment grew by an extremely high 8.1% to an all-time high, well out-pacing the nation's 0.9% employment growth and matching the state. Employment growth mirrors the state's and appears to be driven mainly by broad private sector growth, as governmental employment fell year-over-year. Household income levels are above state and national averages.

ADEQUATE DEBT SERVICE COVERAGE; WEAK ADDITIONAL BONDS TEST

The excise tax bonds' rating is weighted by Fitch's view of the pledged revenue stream as somewhat narrow, volatile, and passive. The additional bonds test is somewhat weak, requiring 1.25x average annual debt service coverage. Bondholders benefit from a cash-funded debt service reserve fund.

Coverage of maximum annual debt service (now equal to annual debt service through maturity in 2018) stood at an adequate 1.32x in fiscal 2013, up moderately from 1.27x in fiscal 2012 and 1.30x in 2011. Fiscal 2012 coverage dipped slightly due to a 2.8% decline in Class C Road revenues, versus management's former expectation of a slight increase. The variation may be due to reductions in the price of gas, as economic activity for the year was positive overall.

Management expects modest growth in Class C Road revenues moving forward, based on robust economic growth. Fitch believes the growth assumption is reasonable, but remains cognizant that gas prices can be volatile and difficult to predict.

Fitch estimates Class C Road revenues would have to decline a cumulative 24% from fiscal 2013 levels for debt service coverage to reach 1.0x. By comparison, the revenue stream's largest recessionary decline was 13.2%. Fitch also estimates that revenues would have to decline by more than 5.3% annually through fiscal 2018 maturity for coverage to drop below 1.0x.

SOLID FINANCIAL POSITION, ADEQUATE REVENUE FLEXIBILITY

The city's financial operations are solid overall, as exhibited by a sound and growing general fund balance, three years of structural surpluses, and ample liquidity. Audited fiscal 2013 general fund operations produced a $502,000 surplus, raising the total and unrestricted fund balances to solid levels of $5 million (38% of expenditures and transfers out) and $2.7 million (20.5%), respectively. State statute bars municipalities from carrying balances above 25%.

The city's fiscal 2014 budget includes a $300,000 operating deficit. However, the budget includes $462,000 of capital costs, and includes multiple conservative items that suggest actual results likely will be closer to balanced. The city has a history of out-performing its budgets.

Although the city's revenues dipped significantly during the recession, revenue flexibility is adequate, and revenues are well diversified overall, with no single source making up more than 30% of total general fund revenues.

Property taxes have remained stable and growing due in part to a rate-setting mechanism that adjusts property tax rates to achieve the prior years' tax levy, plus new growth. This mechanism provides excellent downside protection in recessionary environments, but is not indexed to inflation, and limits upside potential in a robust economic environment.

The city council may raise property tax rates with a majority vote after conducting a non-binding public hearing, per the Truth in Taxation statute. Although this provides ample legal flexibility, there are political considerations that can effectively limit revenue raising flexibility.

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, 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=820050
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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:
Karen Ribble, +1-415 732-5611
Senior Director
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Elizabeth Fogerty, +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:
Karen Ribble, +1-415 732-5611
Senior Director
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com