TEXT - Fitch revises West Valley City, Utah outlook to stable
Dec 31 - Fitch Ratings assigns an 'AA' rating to the following West Valley City, Utah (the city) sales tax revenue refunding bonds: --$5.6 million series 2013A (tax-exempt); --$1.1 million series 2013B (taxable). The bonds are scheduled to sell via negotiation the week of January 7, 2013. Proceeds will refund the city's series 2002 C and 2008A sales tax revenue bonds. In addition, Fitch affirms the following ratings: --$10.2 million sales tax revenue bonds, series 2001A, 2002C, 2008A at 'AA'; --$34.0 million lease revenue bonds, issued by the West Valley City Municipal Building Finance Authority (the authority), series 2006A and 2006B at 'A+'. The Rating Outlook for all bonds is revised to Stable from Negative. SECURITY The sales tax bonds are secured by a pledge of local 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 secured by the city's covenant to budget and appropriate lease rental payments. The bulk of leased assets consists of the 17,000 square foot Maverik arena and the Hale Centre Theatre, and also includes a fire station and two fire trucks. KEY RATING DRIVERS IMPROVED FINANCIAL POSITION: The revision to a Stable Outlook reflects improved financial performance and substantial rebuilding of reserves that were depleted during the recession. A significant property tax increase and operating expense discipline have more than fully offset rising debt service obligations, allowing the city to regain budgetary balance. STRONG SALES TAX COVERAGE: Senior lien sales tax coverage is strong and performs well under various Fitch stress scenarios. STABLE ECONOMY: The city benefits from its location within the strong, diverse Salt Lake City metro area economy. West Valley's unemployment rate was well below the national average at just 5.1% in October. The city has, however, experienced assessed valuation (AV) declines in recent years. MODERATE DEBT BURDEN: The city's debt burden is moderate to high. Debt ratios are significantly increased by the city's participation in the Utah Telecommunications Open Infrastructure Agency (UTOPIA). The multi-city broadband project was originally expected to be self-supporting but has not been, putting significant pressure on the city's general fund. MODEST POST-EMPLOYMENT LIABILITIES: The city participates in well-funded state-administered pension plans, and it has no other post-employment benefit liability. APPROPRIATION RISK: The 'A+' rating on the lease revenue bonds additionally reflects the appropriation risk inherent in the lease structure and the non-essential nature of the leased assets. CREDIT PROFILE West Valley City, the state's second most populous with 132,000 residents, benefits from its location in economically dynamic Salt Lake County (rated 'AAA' by Fitch). The city is located on the southwest border of Salt Lake City. IMPROVED FINANCIAL PERFORMANCE The city's financial position strengthened in fiscal years 2011 and 2012, as the city replenished reserves that it spent during the recession. Unrestricted fund balance rose to $11.4 million, or 15.6% of expenditures and transfers out in 2012 from $7.8 million, or 11.8% of spending, in 2011. The city's financial position improved due to gains in economically sensitive sales tax revenues and a significant increase in property tax revenues, raising total tax revenues by 13.9% in 2012 from the 2011. Revenue gains followed significant expenditure cuts in 2011 and resulted in a second consecutive operating surplus that returned the city's total fund balance to pre-recession levels. The city's capital improvement fund includes about $2.5 million of funds that could be swept back to the general fund if the City Council decided, providing another 3.4% of spending in reserves. The city's revenue sources are diverse and fairly stable. The three main revenue streams are property taxes (34% of general fund revenues), sales taxes (28%), and franchise taxes (14%). In fiscal 2012, the city increased its property tax rate a significant 18% to yield an additional $3.5 million in revenue in part to cover increased costs associated with UTOPIA, the multi-city broadband project. The city maintains significant further capacity under the statutory property tax limit even after the 2012 tax increase. The city's fiscal 2013 budget appears roughly balanced with a small ($450,000) draw on fund balance planned. Conservative revenue and expenditure projections, as well as a history of positive budget-to-actual comparisons, suggest the city is likely to post another net surplus in fiscal 2013. AGGRESSIVE ECONOMIC DEVELOPMENT West Valley has backed several economic development efforts that create or have the potential to create pressure on the city's finances. The most important is UTOPIA. The city is the largest of 11 participants in regional broadband project. The city pledged general fund sales and use taxes revenues, on a subordinate basis to its own sales tax revenue bonds, to guarantee a portion of UTOPIA's bonds. The city's UTOPIA payments equate to about 5% of its budget, and it appears that the city will have to continue making payments near this level for the foreseeable future. Payments are capped at $4.13 million until 2020. While the city has adjusted tax rates appropriately to offset this new expense, Fitch notes that the use of taxing capacity for non-core government services is unusual and lessens the city's financial flexibility going forward. The city also made a subordinate pledge of sales tax revenues to support $5.3 million of its Redevelopment Agency's 2012 subordinate tax increment and sales tax revenue bonds, and helped to finance a $32.0 million Embassy Suites Hotel. Construction of the hotel has recently been completed, and the city expects the hotel to be self-supporting. STRONG SALES TAX COVERAGE Sales tax collections have been volatile, but have consistently provided strong debt service coverage for the sales tax revenue bonds. Sales tax collections declined sharply in the recent recession, dropping 21.6% from their peak in 2008 to their trough in 2010. Moderate gains since that time has pushed collections up 12.4% to $19.8 million in 2012. Coverage has remained solid due to judicious leveraging. Senior-lien sales tax revenue bond coverage has averaged 5.2x over the past five years with a low of 3.7x in 2011. Coverage was 5.9x in 2012 with maximum annual debt service (MADS) coverage at a very healthy 3.2x. Coverage on an all-in basis, including the subordinate obligation to the UTOPIA bonds, was solid at 2.9x with MADS coverage at 1.8x. Sales tax revenue can decline over 40% before all-in MADS coverage falls below 1.0x. No additional leveraging is expected in the near term. The senior lien indenture includes a 2.0x additional bonds test, providing good protection against overleveraging. The bonds will also be secured by a standard debt service reserve fund. SIGNIFICANT DEBT BURDEN, BUT MANAGEABLE POST-EMPLOYMENT LIABILITIES The city's direct debt burden is moderate at about $1,600 per capita but a somewhat high at 4.6% of market value. Debt ratios include the city's share of UTOPIA's $185 million of bonds. Amortization is solid with about 55% of principal, not including UTOPIA debt, retired within 10 years. The city's post-employment liabilities are less of a concern than for many other cities. The city makes its annual required contribution to the state pension fund, which is generally well funded. The city has no liability for post-employment health benefits. SOLID ECONOMY The city's economy is fundamentally solid with a significant, diverse service industry employment base and a significant retail sector, including the Valley Fair Mall, which has garnered significant, needed reinvestment in recent years. The city's central location allows residents to take advantage of opportunities across a large and dynamic Wasatch Front regional economy. The city's unemployment rate trends below national levels, but somewhat above state levels. Median household income is close to the national level, but 92% of Utah's level. The city's tax base has declined since the national housing downturn. Market value declined 13.8% from its peak in 2008 through 2011. Fitch believes the tax base remains under near-term pressure, but has reasonably solid prospects in the longer term, due to the city's location and ongoing, active investments in the local commercial sector. The tax base is reasonably diverse with the top 10 tax payers representing 11.4% of AV.