SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following Redevelopment Agency of the City of South Jordan, Utah bonds:
--$12.5 million subordinate sales tax and tax increment revenue bonds.
In addition, Fitch affirms the following ratings for South Jordan, UT:
--$15.1 million sales tax revenue bonds series 2006 and 2008 at 'AA+';
--$10.8 million Municipal Building Authority lease revenue bonds at 'AA';
--Implied general obligation (GO) bond rating at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The sales tax revenue bonds series 2006 and 2008 are payable from a first lien on the local sales and use tax revenues levied at the maximum 1% rate, which are distributed based on a combination of population and point-of-sale activity.
The subordinate sales tax and tax increment revenue bonds series 2015 are payable from a subordinate lien on the local sales and use tax revenues described above, as well as a portion of incremental tax revenues generated from the redevelopment project area, excluding 20% housing allocation.
The lease revenue bonds are payable from lease payments subject to annual appropriation by the city. The leased assets for the refunding lease revenue bonds are the historical museum, including the land and 88,862 square foot building, along with the recreation project, consisting of a pool and fitness center, ball fields, support facilities, a skate park, and related assets.
KEY RATING DRIVERS
SOUND COVERAGE: The 2015 series 'AA+' rating reflects sound all-in maximum annual debt service coverage (MADS) based on fiscal 2015 sales tax revenue. Coverage is expected to improve as sales tax grows and tax increment revenue comes online in fiscal 2018. Senior lien bond debt service coverage is very high.
STRONG FINANCIAL PROFILE: The city's strong financial profile reflects solid reserves, growing revenue base, consistently balanced financial performance, and conservative financial policies.
ROBUST ECONOMY: The local economy benefits from its easy access to the greater Salt Lake MSA and a growing population, as reflected in the above average wealth levels, low unemployment rate, and diverse range of employers.
LOW DEBT BURDEN: The city's overall debt burden is projected to remain low with its intention to fund future capital projects mainly on a pay-go basis. The city consistently makes its annual required pension contribution and has no outstanding other post-employment benefit liability.
RATING SENSITIVITIES
The revenue bond ratings are sensitive to significant fluctuations in coverage ratios. Revenue bond and implied GO ratings are sensitive to shifts in fundamental credit characteristics including the city's strong financial position. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The city of South Jordan covers 22.3 square miles of southwest Salt Lake County, 15 miles south of Salt Lake City. The city is one of the fastest growing in the U.S. with a 2013 population of 59,366, more than double its 2000 total (29,437).
The city is primarily residential but has a growing mix of commercial, retail, and industrial businesses. South Jordan benefits from several attributes that have led to its rapid population increase, including significant areas of land available for development and good public transit and highway access to the greater Salt Lake region.
SUBORDINATE SALES TAX REVENUE BONDS
The intended repayment source for the 2015 series bonds is tax increment revenue which the city will start collecting on the project area beginning in fiscal 2018. Incremental assessed value as of fiscal 2015 is $35.6 million and is projected by the city to grow to $109.4 million after two major projects are completed by fiscal 2018. Assuming no further tax increment growth after fiscal 2018, a constant total property tax rate of 1.34%, and excluding the 20% housing allocation, tax increment revenue would be sufficient to just cover corresponding debt service.
However, given the uncertainty as to the availability of this pledged source, Fitch's analysis focuses on sales tax revenue. Receipts were $10.9 million in fiscal 2015, yielding a sound all-in MADS coverage at 2.6x. A 62% decline in sales tax revenue from its 2015 level would yield 1x all-in MADS coverage. Adding tax increment revenue as projected, all-in MADS coverage improves to 2.9x. Further protection is provided by an ABT of 1.5x and a lack of additional issuance plans.
Given the growing nature of the city and its revenues, historical downside sales tax revenue volatility has been low. The largest decline experienced was only 4%, while annual increases as high as 36% have been recorded. The city's top 10 sales taxpayers contributed to a total 58% of sales tax revenue by point-of-sale, and the list is dominated by retail/grocery (25%), mining (15%), and auto sales (14%). The concentration concern is partly mitigated by gradual diversifying of industries and the state redistribution of collections from sales generated within the state.
STRONG SENIOR DEBT SERVICE COVERAGE
Debt service coverage on the sales tax revenue bonds remained strong in fiscal 2014 at 6.2 times (x). Sales tax revenue would have to decline by approximately 84% from this level to reach 1.0x maximum annual debt service. Coverage is projected to remain high with no additional debt issuance plans and by the relatively strong additional bonds test of 2.0x.
STRONG FINANCIAL PROFILE
The city's unrestricted general fund balance is consistently maintained near the legal maximum level, which was recently raised to 25% from 18% of budgeted revenues. At the end of fiscal 2014, the city's unrestricted balance was $7 million or a solid 19.4% of spending. Additional financial cushion in the capital projects fund at the end of fiscal 2014 was $16.5 million (46% of general fund spending).
The city generated operating surpluses in six of the past seven audited fiscal years with an estimated operating surplus (before transfers) of $4.8 million (14% of general fund spending) projected for fiscal 2015. Part of the surplus was added to the ending general fund balance with the rest transferred to the capital projects fund to keep the general fund balance in compliance with the legal maximum.
Capital projects fund cash balances are used to finance most capital needs, a practice that Fitch views as favorable to credit quality. City officials stated that the capital projects fund and several other funds are available to support the general fund, if necessary. As of fiscal 2015 year end, the capital projects fund unrestricted balance is estimated to grow to $19 million.
The city benefits from a relatively diverse revenue base with approximately 64% of total revenues generated through various taxes. The three largest revenue sources are sales tax (27%), property tax (27%), and franchise tax (9%). Tax revenues have increased annually since at least fiscal 2008 and are estimated or projected to grow by 3% and 5% in fiscal 2015 and 2016 respectively.
Stability of the city's revenue base is further supported by Utah's institutional features. For example, Utah's property tax rate is automatically adjusted to generate approximately the same revenue as the previous year plus new growth, minimizing the impact of changes in property values. In addition, sales tax revenue is distributed according to the 50/50 formula, by which cities receive 50% of their revenues from locally generated sales, with the remaining redistributed by the state to municipalities based on population. The formula partly reduces potential concentration concerns at the local level.
SOUND ECONOMY
South Jordan benefits from an increasingly diverse local economy as well as its participation in the broad and diverse greater Salt Lake regional economy. Major local employers and taxpayers include mining companies Rio Tinto/ Kennecott, Merit Medical, eBay, Morgan Stanley, and dental product manufacturer Ultradent. In addition, the city is well positioned to participate in the regional economy with good access to highway 15 and two UTA transit lines.
South Jordan's local economy also benefits from above average wealth levels and a low unemployment rate. Per capita income and median household income are 123% and 153%, respectively, of Utah's average. The unemployment rate in the city remains low at 3.6% (August 2015) compared to the nation's average of 5.1%.
LOW LONG-TERM LIABILITY BURDEN
The city's debt burden is low with overall debt ratios of $1,377 per capita and moderate at 1.3% of taxable value. As expected with a growing population, the city has significant capital needs but has largely avoided new money debt issuance in recent years and instead relied on available reserves as main source of funding. The city has no other postemployment benefit liability, and makes its annual actuarially required pension contributions to Utah Retirement Systems. The city's portion of the unfunded pension liability as reported pursuant to GASB 68 is estimated to be well funded at 88%, using Fitch's more conservative 7% discount rate. Carrying costs (debt service plus actuarially required pension contribution) were affordable at 12% of governmental expenditures in fiscal 2014.
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, Underwriter, and Zillow.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993423
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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