SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following rating on Springville, Utah's (the city) unlimited tax general obligation bonds (ULTGO):
--$8 million series 2010 at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited ad valorem tax on all taxable property within the city.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: The city has consistently achieved balanced operations since fiscal 2011, helped by rebounding sales tax revenues and building permit application fees. Sales tax revenues account for almost one-third of total general fund revenues as of fiscal 2015 and have been inherently more volatile and sensitive to economic conditions.
STABLE ECONOMY: The diversified tax base experienced moderate declines during the recession, but started to recover in fiscal 2013. The city also benefits from a well-educated workforce and a consistently low unemployment rate.
MANAGEABLE LONG-TERM LIABILITY BURDEN: The overall debt ratios are moderate, and the city participates in well-funded pension plans. Debt and pension carrying costs are moderate, and are expected to remain stable.
RATING SENSITIVITIES
STABLE OUTLOOK: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Springville is located in the center of Utah County, directly south of Orem and Provo cities along the I-15 freeway corridor, and serves as a bedroom community to those employment centers. Population has been growing steadily over the past decade from around 20,000 in 2000 to over 31,000 in 2014. Modest population growth of around 2% annually is expected to continue, in line with the expansion of the city's commercial, retail and industrial sectors. The largest employers include Wal-Mart, Nestle and other manufacturing companies.
AVERAGE ECONOMY
The city enjoys a favorable unemployment rate, which has recently trended even lower. It stood at 2.6% in December 2015, compared favorably to 3.7% in Utah and 5.2% nationally. This may be attributable to its well educated work force with proportionally more degree holders versus the national average, as well as appropriate job opportunities in the metro area. The city's median household incomes are on par with state and national averages, but a much larger family size weighs on per capita incomes.
The city's assessed values (AV) peak to trough decline was a relatively moderate 9%. Recovery started in fiscal 2013, with a 3.6% increase, followed by 6.7% and 7.9% in 2014 and 2015 respectively. Home prices experienced a 6.4% year-over-year increase according to Zillow. Strong permit application numbers should support AV growth as well.
SOUND FINANCIAL PERFORMANCE
Continued revenue improvements and effective cost control resulted in another year of general fund operating surplus in fiscal 2015. The year-end unrestricted general fund balance was $4.2 million, equivalent to the legal maximum of 25% of expenditures.
The city also routinely allocates general fund transfers to capital projects funds necessary to keep the city's unrestricted general fund balance below the state mandated level (18% of projected revenues in the past, increased to 25% recently). As of fiscal 2015, the city had $1.3 million in unrestricted capital project funds.
Fiscal 2016 year-to-date sales tax collection indicates a flat or slightly decreasing trend due to sales being diverted to a chain retailer opening a new site nearby. Management expects the impact will be offset by better than expected building permit activities and tight expenditure control and that the city will still be able to achieve structural balance.
The city continues to face cost pressures in personnel and benefit costs as well as growing demand in city services as population expands. Fitch expects the city's reasonable expenditure flexibility and strong financial management practices to result in continued balanced operations.
SALES TAX REVENUE VOLATILITY AND CONCENTRATION
The general fund revenue sources are relatively diversified. However, sales tax revenues still account for 31% of total general fund revenues as of fiscal 2015. Sales tax revenues are inherently more volatile and sensitive to economic conditions. In the recent past, sales tax receipts have had double-digit annual increases or declines, making it more difficult to plan ahead and budget for the general fund revenues. Sales tax revenue is now 11% above pre-recession high (as of 2015) after five years of strong growth.
At the same time, 46% of locally generated sales taxes are concentrated in the top 10 taxpayers with top one generating 25%. This level of concentration is not uncommon, and is somewhat mitigated by the state's sales tax distribution formula partly based on population. Roughly 60% of the city's sales tax receipts are from the population based distribution, and the rest come from sales generated within the city boundaries. Nonetheless, the city's practice of conservative budgeting and maintaining ample reserves are an important mitigant to the concentration and volatility.
MODERATE LONG-TERM LIABILITIES
The city's overall debt ratios are moderate, at $2,705 per capita, or 3.5% of market value. Voters authorized a recent $10.8 million general obligation bonds issuance for an aquatics and activities center in 2015. The city does not anticipate any additional debt issuances in the near term, due to its pay-go capital funding practices, funded vehicle replacement program, and reserves in capital projects funds.
The city participates in the well-funded Utah Retirement System and pays 100% of actuarially required contributions. The combined funded ratio is 86% using Fitch's more conservative 7% investment return assumption. Other post-employment benefits (OPEB) are not offered by the city. Total debt and pension carrying costs were moderate at 17% of total governmental spending in fiscal 2015 and are expected to remain moderate after accounting for 2016 GO debt service and potential modest increases in pension contributions.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published beginning of the second quarter of 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 Fitch's applicable criteria specified below, this action was informed by information from CreditScope, Lumesis, IHS, and Zillow Group.
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
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
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001823
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001823
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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