Fitch Affirms Salt Lake Valley Fire Service Area, UT's LRBs at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the Local Building Authority of Salt Lake Valley Fire Service Area (the building authority), Utah's bonds as follows:

--$30.1 million lease revenue bonds (LRBs) series 2008 at 'AA-'.

Salt Lake Valley Fire Service Area, Utah (the service area):

--Implied general obligation (GO) bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The LRBs are payable from lease payments from the service area to the building authority for use and occupancy of five fire stations. They are additionally secured by a cash-funded debt service reserve fund (DSRF).

KEY RATING DRIVERS

WEAKENED FINANCIAL OPERATIONS: The service area's financial operations deteriorated somewhat over the past few years, unexpectedly producing structural deficits from fiscal years 2012-2014 before consideration of capital spending. Although the board recently passed a minimum fund balance policy, the service area's estimated fiscal year end fund balance nearly equals the minimum balance, so adherence to the policy may require politically unpopular actions to return financial operations to structural balance.

CONCENTRATION CONCERNS DIMINISHED: The legislature approved a statutory modification that allows the district to raise its property tax levy beyond its statutory cap if needed to counterbalance potential assessed valuation (AV) reductions. This statutory change mitigates concerns over high taxpayer concentration in Kennecott Copper, which has a history of large AV appeals.

SOLID LOCAL ECONOMY: The service area encompasses a significant portion of Salt Lake County, which is large, diverse, and well-poised for long-term growth. County unemployment is very low, home prices are continuing to recover, albeit at a slowed rate, and large-scale private and governmental capital investments are continuing.

SOUND DEBT PROFILE: The service area's debt profile benefits from a low debt burden, significant use of pay-as-you-go capital spending, and manageable capital needs. However, amortization is slow.

RATING SENSITIVITIES

ADHERENCE TO FINANCIAL POLICIES: The rating is sensitive to changes in the credit's fundamental credit characteristics, including maintenance of a solid economy, debt profile and financial operations. Maintenance of sound financial operations and adherence to a new minimum fund balance policy will require that the service area return to balanced operations while funding its capital improvement plan.

CREDIT PROFILE

The service area is a special purpose entity that finances fire protection, emergency medical, and other services for a 510 square mile serving about 360,000 residents in unincorporated portions of Salt Lake County (GOs rated 'AAA' by Fitch). The service area pays a member fee to an interlocal cooperative, the Unified Fire Authority (UFA), which manages fire and emergency services for over 435,000 residents, covering half the cities in Salt Lake County, including the service area. While the UFA provides for day-to-day fire department operations, including the provision of fire fighters and administrative staff that support the service area, the service area is responsible for financing its capital facilities and levying taxes to pay its share of member fees to the UFA.

STRONG COUNTY ECONOMY

Although economic figures are not available for the service area, the territory includes about 30% of Salt Lake County's (GOs rated 'AAA', Stable Outlook by Fitch) population of 1.1 million residents and management reports that it is economically similar to the county. Salt Lake County encompasses a significant portion of the state's total population and economic activity. Local economic indicators are strong overall, with September unemployment falling to an extremely low 3.2% from 3.9% the year prior due to expanding employment.

The county is well positioned for continued population and economic growth given ample developable land, substantial capital investments, and a positive business climate.

HIGH BUT IMPROVED CONCENTRATION LEVELS MITIGATED BY STATUTORY CHANGES

The service area historically has been exposed to very high concentration in its top taxpayer, Kennecott Copper, which has a history of successful, large AV appeals. Related risks were further elevated due to the service area levying its property tax rate close to the statutory cap, which could have been reached if Kennecott's appeal of its fiscal 2013 AV had been approved as requested by the taxpayer. Fitch estimated full approval of the appealed amount would have resulted in a $1.2 million service area revenue reduction annually without further AV growth.

Concentration-related risks have been mitigated by two factors. First, the state legislature modified tax statute such that the service area can levy above the statutory rate cap to achieve the prior year's tax levy, though the service area cannot raise the tax rate beyond the cap to raise the tax levy above the prior year's levels. As a result, the service area now enjoys protection against an unexpected decline in AV, whether due to generally falling property values or an appeal from a major taxpayer. Second, concentration in Kennecott Copper fell to a still high 15% from AV from 25% two years ago. Top 10 taxpayer concentration fell to 19% from 27% over the same period.

Reduced taxpayer concentration is due to a reduction of Kennecott's AV due to the partial approval of a prior AV appeal, the annexation of new territory into the service area, new construction, and rising property values. Although Fitch expects Kennecott's concentration levels to vary, perhaps significantly, based on the mine's profitability, Fitch expects long term concentration levels likely will decline with population growth and related new development.

FINANCIAL OPERATIONS SOUND DESPITE RECENT DETERIORATION

The service area's operations are sound, though they have weakened over the past few years. The predominant source of ongoing revenue is property taxes, which generally only grow with new construction, annexations, or a Truth in Taxation process in which the board votes to raise the tax levy. A Truth in Taxation levy hike has not been implemented since 2009 and growing revenues from new construction and annexations have not been sufficient to fully offset rising costs for UFA (the service area's predominant ongoing expenditure). As a result, the service area's financial operations fell into a structurally deficit position beginning in fiscal 2012 after several years of operating surpluses. Related fund balance draw-downs have been accelerated due to significant pay-as-you-go capital financing, lowering the unrestricted general fund balance to a sound $8.8 million (21.5% of expenditures and transfers out) in fiscal 2013 from an atypically high $15 million (43.6%) in fiscal 2010.

Financial management estimates fiscal 2014 general fund operations will produce a roughly $2 million deficit, lowering the unassigned general fund balance close to, and possibly slightly below, the service area's new 15% minimum fund balance policy. Management anticipates operations will be balanced moving into fiscal 2015 given a combination of slowed UFA fee growth, property tax growth from new construction, and either expenditure reductions or tax rate hikes as necessary to achieve fiscal balance. Further, management expects financing for the service area's capital improvement plan will switch from pay-as-you-go sources to GO bond issuances, though the service area will need voter authorization with an expected election date in November 2015.

The service area enjoys significant expenditure flexibility. If needed, the service area could request significant staffing reductions at some of its fire stations, which would result in lowered UFA fees. A moderate degree of revenue flexibility exists, with the service area estimating it could generate an additional $3 million to $4 million of property tax revenues annually by raising its property tax rate to the statutory cap. Doing so could be politically contentious, however.

SOUND DEBT PROFILE

The service area's debt profile benefits from a low overall debt burden equal to $1,056 per capita, or 0.9% of market value. Management intends to bring a GO authorization to an election in November sized roughly to the service area's $21 million capital improvement plan. Although issuance of the full authorization would boost the overall debt burden, Fitch estimates it would nonetheless remain at low levels. Amortization is very slow, with just 27% of principal paid down over 10 years.

The service area has just one employee, so it has no pension or other post-employment benefit (OPEB) liabilities. However, UFA provides a pension to its employees, and costs are passed through to the service area via member fees. UFA participates in the state-run pension system, which is well funded and has undergone reforms in recent years that will lower out-year cost growth. Given recent years' significant pension contribution rate hikes, management views current contribution rates as stable moving forward. UFA's OPEB plan was terminated on Jan. 1, 2014 for new employees, though current retirees will continue to receive benefits.

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.

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=950335

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Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com