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Fitch Rates Midvale Municipal Building Authority, UT's Lease Revs 'A+'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns the following rating to Municipal Building Authority of Midvale City, Utah bonds:

--$7.8 million lease revenue bonds (City Hall Project), series 2012 at 'A+'.

The series 2012 bonds are expected to sell via negotiation during the week of Oct. 22, 2012.

Fitch also assigns to Midvale City (UT) an implied general obligation bond rating of 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by city's annual appropriation of lease rental payments sufficient to pay annual principal and interest.

KEY RATING DRIVERS

STABLE, WELL-MANAGED COMMUNITY WITH HEALTHY FINANCES: The city benefits from strong, tenured management, healthy finances, manageable debt, a stable population base, a well-located retail sector, growth potential, and proximity to the economic hub of Salt Lake City.

PROACTIVE EXPENDITURE REDUCTIONS: Transferring the city's police and fire service obligations to other organizations has both enhanced service provision and generated significant ongoing general fund savings in the near term. However, the resulting reduction in the city's property tax rate has reduced one of the city's most stable general fund revenue sources, leaving the general fund proportionately more exposed to economically sensitive and volatile revenue sources.

EXPOSURE TO EXTERNAL DEBT PRESSURES: The police and fire savings, projected increases in sales and use tax revenues, and considerable flexibility to raise future property tax rates will help fund the city's share of the growing liability for Utah Telecommunications Open Infrastructure Agency and Utah Infrastructure Agency underperformance.

GROWTH PROSPECTS WILL LIKELY ALLEVIATE LOWER SOCIOECONOMIC CHARACTERISTICS: While the city's socioeconomic characteristics tend to be below average, with the notable exception of the unemployment rate, the city's good growth potential will likely improve the city's socioeconomic profile over time.

KEY ESSENTIAL LEASED ASSET: While the series 2012 bonds will fund some less essential assets, the majority of the bond proceeds will fund construction of an essential new city hall and justice court building.

CREDIT PROFILE

PREDOMINANTLY RESIDENTIAL COMMUNITY WITH A SIGNIFICANT BUSINESS COMPONENT

The city covers 5.9 square miles in the middle of the Wasatch Front, Utah's largest population and commercial center, and approximately 10 miles south of Salt Lake City. Midvale City is a predominantly residential community with a stable population of around 28,000 and a significant commercial component comprising 1,164 businesses. The city serves as a retail hub for wealthy surrounding communities and provides 900 hotel rooms servicing the nearby ski area. As a result of the strength of the city's retail sector, the city is currently a net exporter of sales and use tax revenues under the state's formula which distributes 50% of sales and use tax revenues on the basis of point of sale and 50% on the basis of population.

Approximately 16% of the city's total land area remains developable, located largely on two former superfund sites immediately west of the major Interstate-15 artery. While the northern site continues to experience new residential and commercial construction, the southern site has no development at the present time.

Between fiscal years 2003-2009, the city's taxable assessed value (TAV) grew 64% to $1.762 billion. However, this was followed by three years of TAV decline (a cumulative 10% loss), resulting in a TAV of $1.589 billion in fiscal 2012, taking the city back to fiscal 2007 levels. The city's anticipated return to TAV growth in fiscal 2013 (1.5%-2%) seems reasonable in light of permitted residential and commercial developments. The city's retail, office, and industrial properties are performing well with below-average vacancy rates for the area.

The city's below-average income and wealth characteristics likely reflect the disproportionately large elderly population, and large families attracted by housing which is more affordable to rent or purchase than in surrounding communities. The June 2012 unemployment rate of 6.2% is in line with the state (6.1%) and well below the nation (8.4%).

HEALTHY FINANCES WITH EXPOSURE TO VOLATILE REVENUE SOURCES

The city's total general fund balance goal is 15% of general fund revenues, which falls within the 5%-18% range permitted by the state. While the city allowed its total general fund balance to fall below 15% in fiscal years 2010 and 2011, to avoid increasing property taxes during the recession it replenished the fund balance in fiscal 2012 (20.8% unaudited). The city transfers excess revenues to its capital projects fund to meet its pay-as-you-go capital improvement programming.

The city ended fiscal 2011 with a healthy unrestricted general fund balance of $2.2 million or 12.5% of spending. Its unaudited fiscal 2012 unrestricted general fund balance shows an increase to almost $3 million (19.2% of spending), reflecting expenditure savings from the city's contract since 2011 with the Unified Police Department (UPD) and its membership since 2012 in the Salt Lake Valley Fire Service Association (SLVFSA). Contracting with the UPD for police services, rather than staffing its own department, is currently saving the city $700,000 per year. Fitch notes, however, that these savings are subject to future service provision decisions and cost increases by the UPD. Being a member of the SLVFSA rather than staffing its own fire department is saving the city a further $1.3 million per year. These cumulative annual savings of $2 million are allowing the city to both protect its general fund balance and to meet its rising obligations connected to the Utah Telecommunications Open Infrastructure Agency (UTOPIA) and the Utah Infrastructure Agency (UIA), discussed below.

While the city's general fund is performing well, it is exposed to volatile revenue sources. Thirty-eight percent of the city's budgeted fiscal 2013 general fund revenues are expected to derive from sales and use taxes and transient occupancy taxes and a further 17% from franchise and telecommunications taxes. Cumulatively, this represents a significant general fund reliance (55%) on revenues that historically have proven volatile given their sensitivity to the economy. In fiscal years 2008-2010, sales and use tax revenues declined by 21%. Sales and use taxpayers are somewhat concentrated with the top 10 generating approximately 27% of fiscal 2011 sales and use tax revenues.

Conversely, property tax revenues represent a stabilizing revenue source. Under Utah law, if property TAV declines, the property tax rate increases commensurately to maintain the city's revenue stability. However, for Midvale, property tax revenues represent only 8% of its budgeted fiscal 2013 general fund revenues. Midvale significantly reduced its property tax rate after the transfer of fire services to the SLVFSA. The city has the ability to increase property taxes in the future without an election.

STRONG DEBT PROFILE BUT RISING EXTERNAL DEBT PRESSURES

The city benefits from an affordable debt profile, with an overall debt per capita of $2,259 or a low 2.8% of market valuation. The series 2012 issuance lowers the 10-year amortization rate for the city's general fund supported debt from 100% to a still well above-average 61.4%. No further general fund supported debt issuances are planned in the medium term. The city makes its full pension system contributions each year and does not have other post-employment benefit liabilities. The city's total debt, pension, retirement health savings plan, UTOPIA and UIA carrying costs were a manageable 15.9% of general fund expenditures and transfers out in fiscal 2011. They are projected to decline to 14.1% in fiscal 2013.

As a member of both UTOPIA and UIA, Midvale's sales and tax revenues are pledged to its share of any UTOPIA and UIA debt service fund shortfalls created by insufficient net revenues. While any amounts paid by the city are loans to be repaid by UTOPIA and UIA, it is currently unclear when UTOPIA and UIA will be in a position to repay such loans. UTOPIA has a current negative net worth of over $120 million. As of June 30, 2011, the city's percentage of the UTOPIA debt service reserve shortfall was 6.03%. The city's annual commitment increases by 2% per year, ranging from $748,763 in FY 2012 and $778,700 in FY 2013 to $1,329,152 in FY 2040, to be paid out of the general fund. The anticipated UIA pledge amount is 6.6% of any future annual debt service shortfall with a yearly liability capped at $339,988.

The city's UTOPIA pledge contributions represent 5% of its budgeted fiscal 2013 general fund spending. No contribution is required for UIA. While the city expects to fund these growing external obligations from projected sales and use tax revenue increases and the savings from transferring sworn personnel out of the city, it also has the option to raise property taxes if necessary.

The series 2012 bonds have standard legal protections for bondholders, including a bond-funded debt service reserve fund and various insurance requirements for the city and the design and construction contractors. The leased assets to be constructed with the bond proceeds are a mixture of essential (a new city hall/justice court building), less essential (street lights), and non-essential (a new park). Annual appropriation is on an 'all or nothing' basis so that the city cannot choose to appropriate for just the essential asset. The bonds provide for capitalized interest well beyond the expected construction period, with the first principal payment not due until Oct. 15, 2016. The expected funding sources for the city's annual appropriation of lease rental payments include a new lighting fee and significant annual energy savings. The city can also increase its tax rate without an election, if necessary, given the significant room it has under its tax cap. A significant further bondholder protection is the sizeable equity contribution the city is making towards the cross-collateralized projects' construction costs, all of which are located on city-owned land.

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, Zillow.com, 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

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Fitch Ratings
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Source: Fitch Ratings