Fitch Rates Orem, UT GOs 'AA+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned the following rating to Orem, UT's general obligation (GO) bonds:

--$9.6 million refunding series 2014 at 'AA+'.

The series 2014 bonds will sell via negotiation on Nov. 5, 2014.

In addition, Fitch has affirmed the following Orem bond ratings:

--$12.1 million GO bonds, series 2005 and 2006, and GO refunding bonds, series 2004, at 'AA+'. Certain maturities of the series 2005 and 2006 bonds will be refunded by the series 2014 bonds.

The Rating Outlook is Stable.

SECURITY

The GO bonds are general obligations of the city, payable from unlimited ad valorem taxes levied on all taxable property within the city.

KEY RATING DRIVERS

MAINTENANCE OF STRONG GENERAL FUND BALANCES: The city typically achieves balanced general fund operations, allowing it to maintain strong balances and adequate liquidity even throughout the recession. Revenues are now improving, and the city has demonstrated considerable control over its expenditures despite high carrying costs.

RECOVERING ECONOMY AND STABILIZING TAX BASE: The city benefits from a diverse economy and tax base, both of which are improving, driving growth in economically sensitive revenues and unemployment declines. Socioeconomic characteristics will likely remain mixed due to larger family sizes and the city's significant student population.

MANAGEABLE LONG TERM LIABILITIES: Overall debt levels remain moderately low and future capital needs are limited. The city's remaining other post-employment benefits (OPEB) liability is limited and the city fully funds its pension requirements to the state system. Total carrying costs are high partly due to rapid debt amortization and the city's obligation to the Utah Telecommunications Open Infrastructure Agency (UTOPIA).

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and ability to manage its exposure to its UTOPIA liability while funding general services in the context of high carrying costs and statutory revenue constraints. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Orem is located in Utah County about 40 miles south of the Salt Lake City metropolitan area and is home to almost 92,000 residents, making it Utah's fifth most populous city. It encompasses 18.2 square miles and is well situated in the Provo-Orem metropolitan area. The city's population grew a moderate 8.7% between 2000 and 2013.

MAINTENANCE OF STRONG GENERAL FUND BALANCES

Healthy financial results have enabled the city to consistently exceed its policy of maintaining a total general fund balance at 15% of budgeted spending. Following a $4.1 million drawdown in fiscal 2009, in anticipation of needing to rebuild the UTOPIA reserve fund, the city has more than rebuilt its general fund balance. In fiscal 2013, the city's unrestricted general fund balance was a solid $7.7 million or 15.8% of spending. In fiscal 2014, the city projects the unrestricted general fund will grow even stronger to $12 million and then hold steady in fiscal 2015.

The city managed its finances throughout the recession without relying on furloughs or layoffs. It balanced its budget by offering early retirement incentives, maintaining vacant positions, delaying capital projects, and providing no salary, cost of living, or step increases for five years. Instead, the city protected its financial flexibility by providing one-time annual bonuses to employees. In fiscal 2014, given strong revenues and cost control, the city was able to provide a 2% across-the-board pay salary and wage increase. On Jan. 1, 2015, further funding will be allocated to remuneration increases.

Fitch anticipates that the city will continue to respond flexibly to future salary, wage, and benefit pressures as its overall budget permits.

RECOVERING ECONOMY AND STABILIZING TAX BASE

The city benefits from a diverse tax base and economy, with very low unemployment. The city's July 2014 unemployment rate of 3.8% was in line with the state's 3.9% rate and considerably below the nation's 6.5% rate. The regional economy is dominated by large, relatively stable governmental, educational, and healthcare employers, including Utah Valley University within the city's boundaries and Brigham Young University in adjacent Provo. The city also benefits from close proximity to the state's biggest metropolitan area around Salt Lake City. The city is home to more than 4,000 businesses, including 236 high technology companies and a major retail hub centered at University Place which is undergoing a significant mixed use expansion. This project will augment the city's tax rolls incrementally over the next 10 years, as will new multifamily residential developments. The city's political environment and tax structure remains development friendly.

Taxable assessed valuation (TAV) is stabilizing after significant 13.8% losses between fiscal years 2010-2013. It started to rebound in fiscal years 2014 (2.5% growth) and 2015 (2% growth projected) but might take some to time to recover fully the lost value. Given Utah property tax law, the city is somewhat insulated from TAV declines as the tax rate automatically increases to maintain the previous year's property tax revenues plus adjustments for new growth.

Taxpayer concentration remains low, with a diverse set of top 10 taxpayers representing only 7.5% of TAV in fiscal 2013.

The city's socio-economic characteristics are somewhat mixed with below-average per capita and median household incomes but also a slightly below-average individual poverty rate and above-average educational attainment. These characteristics are likely the product of above-average family sizes and the city's large student population.

AFFORDABLE DEBT BURDEN; HIGH CARRYING COSTS

The city's debt position is favorable. Overall debt remains moderately low at $1,649 per capita or 2.4% of market valuation. Amortization is rapid with approximately 91% of outstanding principal repaid within 10 years. The city has no plans to issue debt in the near term.

Each year, the city makes its actuarially required contributions to the Utah State Retirement System. The city eliminated OPEB benefits and is due to pay off the minimal outstanding liability this year. A continuing subsidy for healthcare coverage results in a small $1.4 million liability through 2028.

The city is a member of both UTOPIA and the Utah Infrastructure Agency (UIA), the primary agencies implementing regional efforts to convey fiber optic capacity widely to homes and businesses. Member cities are obligated to subsidize both agencies, to a limited degree, but UIA is currently self-sufficient. The city's $2.8 million UTOPIA subsidy from pledged sales tax revenues in fiscal 2013 totaled approximately 6.6% of general fund spending and reaches a maximum payment of $4.7 million by fiscal 2040.

Fitch's previous concerns regarding the city's reliance on one-time monies and reserves to fund its UTOPIA liability, particularly as it was limiting the city's ability to fund its capital needs and remuneration increases, is abated. Improving general fund revenues and ongoing expenditure restraint positions the city to incorporate UTOPIA subsidization costs into its baseline general fund budget. This is in spite of prior taxpayer resistance to a proposed tax increase to cover UTOPIA costs. UTOPIA payments will be included in the city's long-range financial forecast (due in November 2014) as ongoing general fund obligations. There will be no expectation that UTOPIA will repay the city's contributions.

In fiscal 2013, carrying costs related to debt repayment, annually required pension contributions, and OPEB pay-go were moderately high at 25.4% of total governmental spending. UTOPIA subsidization raised that to a high 30.5% of total governmental spending.

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, and National Association of Realtors.

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=890214

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Contacts

Fitch Ratings
Primary Analyst
Alan Gibson, +1 415-732-7577
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward, +1 415-732-5617
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

Contacts

Fitch Ratings
Primary Analyst
Alan Gibson, +1 415-732-7577
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward, +1 415-732-5617
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