Fitch Rates Riverton, UT's Franchise and Sales Tax Bonds 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned the following rating to Riverton, UT (the city) bonds:

--$9.9 million franchise and sales tax revenue refunding bonds, series 2015 'AA'.

In addition, Fitch has affirmed the following ratings:

--$19.2 million outstanding franchise and sales tax revenue bonds series 2004A, 2007, and 2013 at 'AA';

--Implied unlimited tax general obligation (ULTGO) bond rating at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an irrevocable first lien on the city's franchise tax and 1% local sales and use tax. The franchise tax revenues include energy sales and use levied at the maximum rate of 6%, telecommunication licenses levied at the maximum 3.5% rate, and cable franchise fees levied at the maximum 5% rate.

KEY RATING DRIVERS

SATISFACTORY FINANCIAL RESULTS: The city maintains a track record of conservative financial management and keeps a sound level of reserves in the general and capital projects funds.

HIGH GROWTH ENVIRONMENT: The city is one of the fastest growing municipalities in the state. Significant commercial and residential development continues to add to the revenue base. Property assessed value (AV) has substantially rebounded from recessionary times.

SALES TAX DEPENDENCE; SATISFACTORY FLEXIBILITY: Without a property tax levy, the city is heavily reliant on sales and franchise taxes which are levied at the maximum allowable rates. However the city retains the legal ability to levy a property tax.

LONG-TERM LIABILITY PROFILE STRENGTH: Overall debt and carrying cost levels are expected to remain low. The city funds 100% of its pension ARC to the well-funded statewide system and does not offer other post-employment benefits (OPEB).

ROBUST DEBT SERVICE COVERAGE: The revenue bond rating is on par with the ULTGO rating given the solid coverage and a satisfactory additional bonds test. The city's reliance on sales and use tax revenues for ongoing operations limits the practical ability to leverage the tax further.

RATING SENSITIVITIES

STRONG FUNDAMENTALS: The ratings are sensitive to shifts in the city's strong financial operating cushion and conservative financial management given heavy reliance on sales tax revenues. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Riverton is a predominantly bedroom community located 20 miles south of Salt Lake City with access to Interstate-15 and employment centers. Its population has grown by more than 63% since 2000 to reach an estimated 40,921 in 2013 and is expected to expand by approximately 30% in the coming decade.

WEALTHY BEDROOM COMMUNITY

The city's median household income is 155% of the national average and 140% of the state level. The unemployment rate, a low 2.7% in September 2015, compared favorably to a national average of 5.0%. Major employers include the Jordan School District, the Church of Jesus Christ of Latter-day Saints, Intermountain Healthcare Hospital, and various national retailers.

The city has begun development on the 85-acre Mountain View Place, a retail and corporate business park that is anticipated to bring over 4,000 new jobs to the area. The city expects the development to add significant value to the sales tax base, with the first store scheduled to open in 2017.

REBOUNDING HOUSING MARKET

The tax base is still recovering from a 21% loss in taxable AV during the national housing downturn. Taxable AV increased approximately 6% in fiscal year 2014 and an additional 7% in fiscal year 2015. After experiencing a 3.1% increase over the past year, the Zillow home price index is projected to increase 5.6% over the next year. The city is expecting to issue building permits for 125 single-family and 247 multi-family units during the current fiscal year. Fitch believes these positive trends bode well for future tax base growth.

SALES TAX DEPENDENCE

Economically sensitive sales and use tax revenues comprised an elevated 57% of general fund revenues in fiscal 2015. Sales and use tax revenues grew rapidly until fiscal 2009, when recessionary weakness resulted in three years with virtually no change. Revenues have picked up by 4 - 7% annually in the last four fiscal years, reaching $5.6 million in fiscal 2015, and are budgeted to increase 6% in fiscal 2016. The sales and use tax is levied at the maximum 1%, collected by the state, and remitted to the city monthly base on a redistributive formula that takes into account point of sale and population. Fitch expects sales tax revenue to continue to be influenced by the city's population growth patterns.

Net franchise taxes, which include telecommunication tax and energy tax, go to the capital projects fund. Similarly to sales tax revenues, they enjoyed rapid growth before 2009, and recent year increases have been moderate at around 2 - 5% annually. However, fiscal 2015 revenue of $2.4 million (equivalent to 27% of general fund revenue) represented a 2% drop due to telecom tax receipts trending lower and decreased energy tax receipts partly attributable to a warmer winter.

The city ceased levying property taxes as of fiscal 2012 and transferred law enforcement expenses to the Salt Lake Valley Law Enforcement Service Association (SLVLESA) to capture future cost savings. Both SLVLESA and the Salt Lake Valley Fire Service Area levy property taxes on city residents for public safety services. The city retains full discretion to levy property taxes in the future but instead currently levies franchise, sales and use taxes at their maximum rates. While the city is not in need of these additional funds, a one-mill property tax levy would generate $2.2 million (24% of fiscal 2015 general fund revenues) in additional revenues.

HEALTHY FINANCIAL CUSHION

Financial operations have yielded sound reserves. Management has continued to temper spending by capping employee defined contribution pension and healthcare costs. In compliance with Utah's 25% maximum general fund balance limit, the city maintains moderate fund balances in its general fund and significant reserves in its capital project fund. Unrestricted general fund reserved ranged between 11% and 16% of general fund expenditures from fiscal 2011 to fiscal 2015, with $1.2 million (or 11% of expenditures and transfers out) at the end of fiscal 2015.

Although primarily designated for economic development, reserves in the capital projects fund are available to the general fund by 4/5th of council votes. At the end of fiscal 2015, $3.1 million (30% of general fund spending) unrestricted funds were available in the capital projects fund.

ROBUST DEBT SERVICE COVERAGE

Debt service coverage is strong at 4.1x in fiscal 2015. Fiscal 2015 revenues cover MADS (which occurs in fiscal 2030) by 3.3x. Pledged revenue would have to decline by 70% to reach 1x MADS. Fitch views the 2x additional bonds test as providing sound protection against overleveraging.

LONG TERM LIABILITY PROFILE A CREDIT POSITIVE

Overall debt is low at $1,571 per capita and 1.9% of market value, and expected to remain so given the lack of sizeable capital needs. All of the city's direct debt is in the form of franchise and sales tax revenues bonds. Amortization is slow with 28% retiring in 10 years.

The city participates in the well-funded Utah Retirement System and pays 100% of actuarially required contributions. The city's portion of the unfunded pension liability as reported pursuant to GASB 68 is estimated to be $3.5 million, or 0.1% of market value. The city's portion of the plan is well funded at 86%, using Fitch's more conservative 7% discount rate. Other post-employment benefits are not offered by the city. Total debt and pension carrying costs were an affordable 13% of total governmental spending in fiscal 2015.

Additional information is available at 'www.fitchratings.com'.

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.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

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

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995186

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Yueping Liu
Associate Director
+1-415-732-5629
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Yueping Liu
Associate Director
+1-415-732-5629
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com