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.
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
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
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.
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
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
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
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.