SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned the following rating to Salt Lake County (the county), Utah:
--Approximately $38.7 million federally taxable general obligation (GO) refunding bonds, series 2012B 'AAA'.
The bonds will be sold competitively on Oct. 25, 2012 and proceeds will be used to refund prior GO issuances for interest savings.
In addition, Fitch affirms the following ratings:
--$257.2 million (pre-refunding) GO bonds at 'AAA';
--$96.4 million sales tax revenue bonds at 'AA+';
--$74 million transportation tax revenue bonds at 'AA'; and
--$79.2 million Municipal Building Authority of Salt Lake County (building authority) lease revenue bonds at
The Rating Outlook is Stable.
The GO bonds are secured by the county's GO pledge, payable from ad valorem property tax revenues to be levied without limitation as to rate or amount within the county. The sales tax revenue bonds are secured by county option sales and use tax revenues collected and distributed by the state. The transportation tax revenue bonds are secured by state Highway Fund revenues received by the county pursuant to an interlocal cooperation agreement with the state. The lease revenue bonds are secured by the county's lease rental payments to the building authority under two master leases, with a mix of cross-collateralized assets under each.
KEY RATING DRIVERS
DIVERSE AND HEALTHY ECONOMY: The county encompasses approximately 37% of Utah's population and benefits from a diverse economic base that has outperformed the nation both before and after the recent recession. Assessed value (AV) declines have been relatively muted and unemployment rates remain well below the national average.
PRESSURED OPERATIONS: The county's results for 2011 and budget for 2012 reflect the planned drawdown of fund balance to offset a structural imbalance between general fund revenues and expenses. Fund balances should remain healthy in the near term despite these drawdowns, but the county will be challenged to restore operating balance in the face of ongoing cost pressures.
STABLE PROPERTY TAX REVENUE: Property tax accounts for almost one-half of general fund revenues and provides a steady source of funding as a result of annual tax rate adjustments that offset changes in AV for existing properties. While this arrangement limits revenue growth during housing booms, it also protects local governments from revenue declines when property values fall.
STRONG DEBT POSITION: Direct and overlapping debt levels remain low and amortization is rapid. Coverage for the county's sales tax revenue bonds is healthy.
DIVERSE AND HEALTHY ECONOMY
Salt Lake County is Utah's economic center and includes 37% of the state's population. The county's long history of population, employment, and economic growth was diminished during the recent recession, but it continues to outperform relative to national averages. The county's unemployment rate as of July 2012 was 6.0%, as compared to the national average of 8.6%, and reflects slow but accelerating year-over-year improvement in employment levels since October 2011. Taxable AV fell by 14% between 2008 and 2012, but these declines followed a 33% increase during the previous three-year period.
OPERATING PRESSURES CONTINUE
The county has managed revenue declines during the recent downturn with a combination of expenditure controls, one-time transfers, and planned drawdowns of fund balance. Such actions resulted in general fund surpluses in 2009 and 2010 and deficits for 2011 and 2012; the county's fiscal year coincides with a calendar year. Unrestricted fund balance (the sum of committed, assigned, and unassigned fund balances per GASB 54) of $40.1 million at the end of 2011 was equal to 15.8% of general fund spending, as compared to unreserved fund balance of $50.9 million (20.9% of general fund spending) at the end of 2010. A budgeted fund balance drawdown of $4.8 million for 2012 would further reduce the county's financial cushion.
The county's structural imbalance reflects a history of constrained property tax growth. State law provides for the automatic adjustment of tax rates to offset assessed value changes for existing properties, but increases are subject to the state's truth-in-taxation requirements. This mechanism protects local jurisdictions from revenue declines when property values fall, but requires a public hearing process and affirmative vote of the local governing body in order to increase revenues, apart from those due to new construction. Salt Lake County has deferred such increases for more than ten years, restricting the growth of its largest revenue source as spending requirements increased due to population growth and inflationary cost pressures. Conservative budgeting and prudent financial management has allowed the county to maintain healthy reserves despite these pressures, but further expenditure cuts or revenue increases may be required to restore structural balance over the longer-term.
STRONG DEBT POSITION
Debt levels remain low as a result of the county's reliance on pay-as-you-go financing for capital projects. Also, amortization is rapid, with approximately 71% of outstanding debt repaid within 10 years. Net direct and overlapping debt is affordable at approximately $1,450 per capita and 1.5% of market value. The county participates in eight state-sponsored pension plans and is likely to face higher contribution requirements over the next several years to offset recent investment losses. Retiree health benefits are funded on a pay-as-you-go basis, resulting in a growing other post-employment benefits liability.
The 'AA+' rating for the sales tax revenue bonds reflects the sound coverage provided by pledged sales and use tax revenues. Although receipts have been volatile historically, 2011 revenues provided coverage of 4.5 times(x) maximum annual debt service (MADS) and can withstand significant revenue stress. A proposed issuance of additional parity debt in 2012 has been postponed, but would reduce coverage to a still healthy 3.5x MADS after issuance if issued. Sales tax revenues increased by 7% in 2011, and another 4% gain is budgeted for 2012.
The county's transportation tax revenue bonds are supported by state Highway Fund revenues transferred to the county annually in an amount equal to 2.0x debt service. Pledged Highway Fund revenues include two 0.25% sales taxes and 50% of a $10 per vehicle registration fee levied in Salt Lake County and collected by the state.
The lease revenue bonds feature satisfactory legal provisions under the county's two master leases, including an annual appropriation covenant. There is also a cross-collateralization of pooled assets under each of the master leases which counterbalances assets with somewhat lower essentiality.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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
U.S. Local Government Tax-Supported Rating Criteria
Stephen Walsh, +1-415-732-7573
650 California Street, 4th Floor,
San Francisco, CA 94108
Alan Gibson, +1-415-732-7577
Douglas Scott, +1-512-215-3725
Elizabeth Fogerty, New York, +1-212-908-0526
Source: Fitch Ratings