News Column

Fitch Rates Local Building Authority of Salt Lake City, Utah Lease Revs 'AA+'; Outlook Stable

January 17, 2014

SAN FRANCISCO --(BUSINESS WIRE)-- Fitch Ratings has assigned the following rating to the Local Building Authority of Salt Lake City, Utah's (the authority) lease revenue bonds: -- $7.4 million , series 2014A at 'AA+'. The bonds will be sold via negotiation on Feb. 4, 2014 . Proceeds will be used to finance a new branch library and provide capitalized interest. The series 2014A bonds mature serially on April 15 , 2016-2035 and are subject to redemption prior to maturity or in the event of damage, destruction, or condemnation. Fitch also affirms the following rating: -- $7.2 million authority lease revenue bonds, series 2013A at 'AA+'; -- $175.3 million Salt Lake City general obligation (GO) bonds at 'AAA'; -- $32.7 million Salt Lake City sales tax revenue refunding bonds, series 2004 and 2005A at 'AA+'. The Rating Outlook is Stable. SECURITY The lease revenue bonds are secured by Salt Lake City's (the city) lease rental payments to the authority, under an annually renewable lease, subject to annual appropriation. The GO bonds are secured by an unlimited pledge of ad valorem tax on all taxable property within the city. The sales tax bonds are secured by a first lien on the city's 1% sales tax as well as additional pledged franchise and utility tax revenues. KEY RATING DRIVERS SIGNIFICANT FINANCIAL STRENGTH: Fitch's 'AAA' rating on the city's GO bonds incorporates the city's diverse and healthy economy, ongoing stable financial operations, substantial financial flexibility, and strong debt position. The 'AA+' rating on the authority's lease revenue bonds is one notch below, reflecting the requirement to budget and appropriate for debt service. LARGE, DIVERSE REGIONAL ECONOMY: Salt Lake City is the major economic and employment center for Utah , featuring a diverse mix of service, government, trade, and tourism-related businesses. VALUED ASSET AND ALL-OR-NOTHING APPROPRIATION: The new branch library will provide an important governmental service. In addition, the city covenants to budget and appropriate money for all lease revenue bonds on an 'all or nothing' basis, thereby reducing the risk of non-appropriation. DEDICATED PROPERTY TAX REVENUES: The city will continue to collect dedicated library property tax revenues irrespective of any non-appropriation decision. While not pledged, the city plans to use these revenues for lease payments. NOT SUBJECT TO ABATEMENT: In the event of asset damage, destruction, or condemnation, the city is obligated to make up any shortfalls in the funding for necessary repairs or replacement. HIGH SALES TAX REVENUE BOND COVERAGE: The credit profile of the city's outstanding sales tax revenue bonds was strengthened in fiscal 2012 with the pledge of additional franchise and utility tax revenues, and the resulting healthy coverage could withstand significant stress. RATING SENSITIVITIES STABLE CREDIT CHARACTERISTICS: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial management practices. Fitch regards material shifts in fundamental credit characteristics as highly unlikely. CREDIT PROFILE Salt Lake City is Utah's capital and the economic and cultural center. The city's economy is diverse, with a stable roster of major employers, and benefits from very low unemployment (3.9% in October 2013 ), employment opportunity and labor force growth, and strong growth in sales and use tax revenues. The city's property market appears to be stabilizing after recent declines, and future growth prospects are good in light of property developments currently underway or due to commence shortly. However, the city's socio-economic characteristics are somewhat suppressed in comparison to state and national averages, reflecting the state's mostly urbanized central city population. SOUND FINANCIAL PROFILE The 'AAA' GO bond rating reflects continued stable financial operations, considerable financial flexibility (including plentiful borrowable funds), and a low, rapidly amortizing debt burden. The city ended fiscal 2013 with a solid unrestricted general fund balance of $24.5 million or 11.9% of spending, a slight increase over the fiscal 2012 ending unrestricted general fund balance of $21.9 million or 11.1% of spending. The city's operating revenues are diverse, led by property and sales tax receipts and franchise fees. Sales tax collections have rebounded from recessionary declines in fiscal 2009 and 2010, posting annual gains of 5%-8% in the succeeding three fiscal years. Fiscal 2013 collections totaled $53.8 million . NEW BRANCH LIBRARY The series 2014A bonds are being issued to construct a new, approximately 19,000 square foot library in the city's Marmalade neighborhood. The $9.4 million project will be funded by the 2014A bond proceeds, to be repaid by city lease rental payments, and $1.9 million in library levy revenues already collected for the project's fittings, fixtures, and equipment. Project costs include capitalized interest which builds in a 12-month cushion against construction delays. The city's lease rental payments to the authority for the series 2014A and outstanding lease revenue bonds are subject to annual appropriation on an 'all or nothing' basis. The city covenants to include the lease rental payment in its annual budget. The city intends to fund its annual lease rental payments from a portion of its ad valorem property tax library levy specifically dedicated to new branch library construction. Fitch regards the branch library as an important asset because it provides a valued governmental service. Asset value incentivizes the city to appropriate annually the full lease rental payment amounts required to repay the bonds. Fitch's 'AA+' rating, one notch below the city's 'AAA' GO bond rating, reflects the value of the asset/service, and the covenant to budget and appropriate on an 'all or nothing' basis. The 'AA+' rating also acknowledges the city's intention to repay the debt using dedicated, though not pledged, property taxation revenues (which the city continues to collect regardless of any non-appropriation decisions). In the event of damage, destruction, or condemnation, any losses will be borne by the city which must continue to make its full lease rental payments (subject to appropriation) and take the necessary action to repair, rebuild, or replace the affected portion of the leased property. The lease also requires the city to insure the facility for the greater of the amount of bonds outstanding or the full insurable value of the building. STRONG SALES TAX BOND DEBT SERVICE COVERAGE Pledged sales and use tax and franchise tax revenues in fiscal 2013 covered maximum annual debt service (MADS) 6.2x. Coverage is assumed to increase under a base scenario that projects 1.6% annual revenue growth through final maturity in 2038. Coverage remains strong at 5.3x MADS under a stress scenario that considers the effects of three consecutive years of 5% declines in pledged revenues, followed by no growth. Fiscal 2014 budgeted sales and use tax and franchise tax revenues would need to decline by 84% to reduce fiscal 2015 MADS coverage to 1.0x. LOW DEBT LEVELS Overall debt levels remain low at $3,001 per capita and 2.4% of market valuation. Amortization is rapid, with nearly 70% of principal repaid in 10 years. The city participates in four state-sponsored pension plans and is likely to face increasing 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 (OPEB) liability which the city is planning to address within the context of health care reform. In fiscal 2013, debt service, pension ARC, and OPEB pay-as-you-go costs represented a manageable 17.9% of total governmental spending. Additional information is available at ' www.fitchratings.com '. 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 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 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815471 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. Fitch Ratings Primary Analyst Alan Gibson , +1 415-732-7577 Director Fitch Ratings, Inc. 650 California Street , 4th floor San Francisco, CA 94108 or Secondary Analyst Stephen Walsh , +1 415-732-7573 Director or Committee Chairperson Steve Murray , +1 512-215-3729 Senior Director or Media Relations: Elizabeth Fogerty , +1 212-908-0526 elizabeth.fogerty@fitchratings.com Source: Fitch Ratings


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