Fitch Rates West Valley City, UT's Sales Tax Bonds 'AA', Lease Rev Bonds 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned the following ratings on West Valley City, Utah (the city) obligations:

--$30.1 million lease revenue bonds, issued by the West Valley City Municipal Building Finance Authority (the authority), series 2016 at 'AA-';

--$8.3 million sales tax revenue bonds, series 2016 at 'AA'.

In addition, Fitch upgrades the following bonds:

--$24.5 million lease revenue bonds, issued by the West Valley City Municipal Building Finance Authority, series 2006 A and B to 'AA-' from 'A+' (pre-refunding);

Fitch has also affirmed the city's Long-Term Issuer Default Rating and $5.9 million sales tax revenue refunding bonds series 2013A at 'AA'.

The Rating Outlook is Stable.

SECURITY

The sales tax bonds are payable from a first lien on sales and use tax revenues currently levied at the maximum rate. The revenues are collected by the Utah State Tax Commission and distributed monthly to all municipalities based on a formula that takes into account the population and taxable sales in each location.

The lease revenue bonds are backed by the city's covenant to budget and appropriate lease rental payments. The bulk of leased assets consist of a 17,000 square foot multipurpose arena, an existing fire station, and a new fire station to be constructed.

KEY RATING DRIVERS

Positive operations and solid reserves are underpinned by significant revenue flexibility, expenditure discipline, and a favorable long-term liabilities burden.

Economic Resource Base

West Valley City, the state's second most populous city with over 136,000 residents, benefits from its central location on the southwest border of Salt Lake City with easy access to transportation links (an international airport, three major highways and a light-rail system). The city is part of the broad and dynamic Wasatch Front regional economy, with a strong service, retail and manufacturing presence. The city's median household income level is comparable to the nation, and local unemployment rates compare favorably with the U.S. average.

Revenue Framework: 'aaa' factor assessment

General fund revenue growth is expected to approach national GDP growth, based on historical trends and current and projected economic activity. The city has the independent legal ability to raise the property tax rate subject to a cap, and has ample headroom at the current rate.

Expenditure Framework: 'aa' factor assessment

Expenditure growth is expected to be in line with the natural pace of revenue gains, benefitting from affordable carrying costs and flexible employment arrangements.

Long-Term Liability Burden: 'aaa' factor assessment

Long-term liabilities are low. The city participates in well-funded state retirement plans and does not offer other post-employment benefits (OPEB).

Operating Performance: 'aaa' factor assessment

General fund balance has been consistently solid as a result of recent positive operations, and the expectation is that the city would rely on these reserves and sound budget flexibility to weather a typical business cycle. No substantial expenditure deferrals were made during the last recession.

RATING SENSITIVITIES

STABLE OPERATIONS: Any material deviation from the city's solid historical performance and sound financial profile could pressure the rating. The Stable Outlook indicates a low likelihood of this occurring over the coming review cycle.

CREDIT PROFILE

Revenue Framework

Almost half of total general fund revenues are generated from economically sensitive sources like sales and franchise taxes, while around two-fifths are from more stable property taxes.

Historical revenue growth has modestly trailed national GDP, and the city's mature status suggests a similar rate of growth going forward.

The city's current operating property tax rate is at 4.2 mills and it has the legal ability to raise it to 7 mills, providing ample revenue flexibility. The city intends to increase the property tax rate by 9% in August 2016, effective for fiscal 2017.

Expenditure Framework

Nearly half of total general fund expenditures are for public safety. The general fund also supports economic redevelopment and community services (cultural and recreational facilities) in the form of loans or annual transfers.

The additional tax revenue generated through the planned property tax rate increase will be spent on fully staffing the police department, adjusting salary scales and other additional operating expenses. The increase in expenditures is expected to be in line with or slightly above revenue growth.

Despite the expected public safety increases, the city retains expenditure flexibility with regard to its core services. Service levels have been restored since the recession, and facility maintenance efforts have also caught up. In addition, the city benefits from affordable long-term liability carrying costs and full control of personnel costs.

However, the city has committed to various economic development efforts which lessens its financial flexibility to a degree. Contractual obligations include a commitment to pay a portion of third party debt issued for a fiber optic cable system (UTOPIA) and a portion of debt issued by the Utah Infrastructure Agency (UIA).

Long-Term Liability Burden

The city enjoys a low level of long-term liability burden of less than 8% of total personal income. Current estimates of the city's share of UTOPIA and UIA debt obligations are included in the calculation. The city participates in the well-funded Utah Retirement Systems, and does not offer OPEB.

Operating Performance

Fairly heavy reliance on economically sensitive revenues results in exposure to revenue volatility, but a combination of sound reserve levels and budget flexibility provide strong financial resilience.

Budget adjustments have lagged revenue changes, but were sufficient to offset losses during the recession. No material expenditure deferrals occurred. During economic recovery, financial cushion and flexibilities have been rebuilt to sound levels.

Sales Tax Revenue Coverage

After declines in sales tax revenues during the most recent recession, the city has realized five years of gains over fiscal 2011-2015. Fiscal 2016 is projected to end with a 2.5% increase in sales tax revenue, and budgeted increase for fiscal 2017 is over 6%.

Legal provisions for sales tax revenue bondholders are solid with a 2.0x ABT, although the critical need for sales taxes to fund operations guards against over-issuance. Fitch does not consider the pledged sales taxes as special revenues under section 902(2) of the bankruptcy code, as they fail to meet several of the requirements specified in Fitch's U.S. Tax Supported Rating Criteria for that designation. As a result, the rating on the city's sales tax revenue bonds is capped by the city's IDR.

To evaluate the sensitivity of the dedicated revenue stream to cyclical declines, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the 15-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 6.7% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is a steep 21.6% decline from fiscal 2008-2010.

Assuming issuance up to the 2x ABT, debt service would be covered by 7.5x the scenario results and 2.3x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with a 'AA' rating that can withstand a normal economic downturn (noting that the fiscal 2008-2010 performance reflected a more severe economic stress). A return to more severe revenue volatility, while not presently anticipated, could put negative pressure on the rating.

Sales tax revenue is also pledged on a surbordinate basis for RDA debt and the UTOPIA debt. All-in MADS is 2.8x based on fiscal 2015 receipts.

Lease Revenue Bonds

The upgrade to the series 2006A and B lease revenue bonds to 'AA-' from 'A+' reflects recent changes to Fitch's U.S. Tax-Supported Rating Criteria that no longer require notching distinctions between typical leases based on essentiality assessments.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008644

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008644

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Yueping Liu
Associate Director
+1-415-732-5629
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Yueping Liu
Associate Director
+1-415-732-5629
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com