SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following ratings for Taylorsville, Utah (the city):
-- $7.4 million sales tax revenue bonds, series 2006 at 'AA';
-- Implied general obligation (GO) bonds at 'AA'.
The Rating Outlook is revised to Stable from Negative.
SECURITY
The sales tax revenue bonds are secured by an irrevocable first lien on the city's 1% sales and use tax revenues collected on nearly all goods sold within city limits.
KEY RATING DRIVERS
FIRE SERVICE UNCERTAINTY RESOLVED: The Outlook revision to Stable reflects the return to structural budgetary balance in fiscal 2014, due to the city's preemptive action to increase property tax rates as well as cost savings associated with the successful annexation to the regional fire district.
MIXED IMPACTS FROM ANNEXATION: Participation in the regional fire district increases the city's dependence upon economically sensitive revenues but also reduces ongoing cost pressures.
STRONG COVERAGE, LOW DEBT: Sales tax revenue bond coverage remains healthy under various Fitch-designed stress scenarios. Overall debt is very low, and long-term obligations are well-funded.
SLOWLY RECOVERING ECONOMY: Economic recovery has been slow, as reflected in sales tax revenues and assessed values (AV) that are still substantially below pre-recession peaks.
SALT LAKE CITY BEDROOM COMMUNITY: The city is part of the Salt Lake City metropolitan area and benefits from a strong regional labor market with consistently low unemployment rates. Moderate concentration exists in the local tax base and top employers.
SALES TAX RATING LIMITED BY IMPLIED ULTGO: The implied ULTGO rating serves as a ceiling for the sales tax revenue bond rating.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's conservative financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Taylorsville is the 10th largest city in Utah, located nine miles southwest of Salt Lake City. The 11 square mile city is a bedroom community with roughly 60,000 residents and is mostly built out with limited population growth expected.
FIRE DISTRICT MEMBERSHIP A CREDIT POSITIVE
Management reports that the city has achieved ongoing budgetary savings by joining the regional fire district, United Fire Service Area (UFSA). Effective from January 2014, UFSA has taken over all fire service related operations and capital costs, which had been rising and causing pressures on the city's general fund. In return, the city will lower its own property tax levy by 50% to alleviate part of the additional tax burden on residents as a result of UFSA's new and separate property tax levy. Management estimates that the amount of revenue loss is less than the fire service savings, resulting in a net budgetary gain (as well as the elimination of future cost pressures).
PRE-EMPTIVE PROPERTY TAX INCREASE ENHANCED FINANCIAL CUSHION
The decision to join the regional fire district could not be finalized until after November 2013 voting. Faced with this uncertainty, the city pre-emptively raised its property tax by 29% in August 2013, anticipating that the city would continue to fund fire service costs. Fitch views this prudent management practice positively, as Fitch was previously concerned that the city might under-budget for fire service expenditures while not raising property tax rates soon enough. The city's fiscal 2013 budget assumptions included savings from joining the regional fire district, which did not materialize due to unexpected voter resistance. The tax rate increase produced a one-time savings of $2 million when the fire district assumed responsibility for fire protection prior to the city's fiscal year-end.
This one-time gain will be transferred to the city's redevelopment agency and capital projects fund. Fitch views reserves in these funds as part of the overall financial cushion available to the city, as the city routinely transferred excess general fund revenues to those funds in the past to comply with Utah fund balance upper limits.
Fiscal 2014 is now likely to be structurally balanced based on year-to-date results, with an ending unrestricted general fund balance of around 16% of fiscal 2014 expenditures plus transfers-out.
MORE ECONOMICALLY CONCENTRATED REVENUES
With proportionally less revenues coming from the more stable property tax, the general fund has become more dependent on economically sensitive sources. Property tax revenues used to account for about 25% of the total, and are especially stable in Utah, benefiting from the automatic rate adjustments when AV falls; they now will account for less than 15% of general fund revenues. In contrast, the historically more volatile sales tax and franchise tax revenues now account for almost 60% of total general fund revenues (up from less than 50%). This structural change in revenues puts additional emphasis on the maintenance of adequate reserves.
SALES TAX PROVIDES STRONG COVERAGE, DESPITE VOLATILITY
Volatility of the pledged sales tax revenue is evidenced by a cumulative 20% fall in two years at the beginning of the recession. The loss has yet to be fully recovered, with the fiscal 2013 amount still 12% below the pre-recession peak.
Even at this lower level, fiscal 2013 sales tax revenues provide solid coverage for the series 2006 bonds, with maximum annual debt service (MADS) coverage at around 6x in Fitch base case. MADS coverage remains above 1.0x under various stress scenarios, including the loss of top taxpayers, continuing revenue declines, and additional debt issuances.
SLOWLY RECOVERING BEDROOM COMMUNITY, MODEST CONCENTRATION
The city's housing market experienced a more severe downturn and a slower recovery compared to Salt Lake City, as evidenced by a 2013 AV at 20% below the pre-recession peak, compared with Salt Lake City's decline of 7%. Zillow anticipates a modest 2% increase in the city's house price index next year, in line with its prediction for the local area.
The city's economic profile is characterized by a healthy labor market, typical of this area. The city's unemployment rate has been historically low, and is trending further down. At 3.8% in December 2013, it compared favorably with the national average of 6.5%.
However, this strength is countered to a degree by moderate concentration in the employment base--two major call center operations account for approximately 14% of all jobs in the city. Moderate concentration also exists in the city's tax base, with the top 10 taxpayers comprising more than 10% of total AV, with the largest taxpayer at more than 2%. Income levels are average.
STRONG LONG-TERM LIABILITIES PROFILE
The city's overall debt ratios are very low, at $375 per capita or 0.6% of market value. Its direct debt, all in the form of sales tax revenue bonds, amortizes rapidly. The city does not anticipate any additional debt issuances in the near term, due to limited needs and planned pay-go funding. Additional drawdown of $1.5 million in privately placed bonds is expected to fund redevelopment agency projects, but it will not cause material change to the debt profile.
The city participates in the well-funded Utah Retirement System and pays 100% of actuarially required contributions (ARC). Other post-employment benefits (OPEB) are not offered by the city. Total debt and pension carrying costs were small at less than 5% of total governmental spending in fiscal 2013, and are expected to stay affordable based on the existing debt service schedule and slowed growth in pension ARC.
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, National Association of Realtors, 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=827129
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.