Fitch Rates Salt Lake County, UT's $22MM GOs 'AAA'; Upgrades Rev Bonds
--$22 million GO bonds series 2015B.
The bonds will be sold via competitive sale on Dec. 8. Proceeds will support the acquisition and improvement of open space, natural habitat, parks and community trails.
Fitch has also upgraded the following ratings:
--$105.1 million sales tax revenue bonds series 2010D, 2012A, and 2014 to 'AAA' from 'AA+';
--$74.0 million transportation tax revenue bonds series 2010A and 2010B to 'AA+' from 'AA';
--$37.5 million excise tax road revenue bonds series 2014 to 'AA+' from 'AA'.
In addition, Fitch has affirmed the following ratings:
--$184.9 million GOs at 'AAA';
--$69.4 million Salt Lake County Municipal Building Authority lease revenue bonds (LRBs) series 2009A and 2009B at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are payable from an unlimited property tax levied on all taxable property in the county. The sales tax revenue bonds are payable from a senior lien on county option sales and use tax revenues collected and distributed by the state. The transportation tax revenue bonds are payable from state highway fund revenues received by the county pursuant to an inter-local cooperation agreement with the state. The excise tax road revenue bonds are supported by a senior lien on a vehicle fee in lieu of tax (uniform fees), and a junior lien on highway fund revenues limited in amount by the collection of vehicle registration fees (preservation fees). The LRBs are supported by payments from the county to the authority for use of various leased assets, subject to abatement.
KEY RATING DRIVERS
HIGH DEBT SERVICE COVERAGE: The upgrade to 'AAA' for the sales tax revenue bonds and 'AA+' for the transportation tax revenue bonds and excise tax road revenue bonds reflects robust debt service coverage, good pledged revenue performance, and strong bondholder protections.
SOUND FINANCIAL PROFILE: The county's financial position benefits from a solid general fund balance, structurally balanced operations, and prudent financial management practices.
SOLID AND DIVERSE ECONOMY: The regional economy is large, diverse, and well-positioned for long-term growth. Unemployment is very low, home values are increasing, and significant private and governmental capital investments are continuing.
STRONG DEBT PROFILE: Debt levels are low and direct principal amortization is rapid. Manageable capital needs will mostly be funded on a pay-as-you-go basis, debt plans are affordable, and the county's primary pension system is well-funded with no significant rate increases anticipated from current levels.
PRUDENT MANAGEMENT PRACTICES: Financial management policies are sound, as demonstrated by conservative budgeting practices, recent years' OPEB reforms, significant use of pay-as-you-go capital financing, and a prudent minimum reserve level that has been regularly exceeded.
RATING SENSITIVITIES
STRONG FINANCES AND REVENUES: The ratings are sensitive to deterioration in the county's strong financial position and declines in pledged revenues that materially impact debt service coverage levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
ROBUST REVENUE BOND COVERAGE
The upgrades to 'AAA' for the sales tax revenue bonds and 'AA+' for the transportation tax revenue bonds and excise tax road revenue bonds reflect improving debt service coverage levels and recognition of the county's reliance on pledged revenues in excess of debt service requirements for operations, which limits the potential for future leveraging. The revenue bonds also benefit from robust requirements for the issuance of additional bonds and a state non-impairment covenant on pledged revenues.
The sales tax bonds are supported by a county option sales and use tax collected by the state and redistributed to the county on a monthly basis. The state allocates 50% of tax revenues to the county in which it is collected and distributes the remaining 50% to counties imposing the tax in proportion to their population.
Coverage on the sales tax bonds reaches 3.4x MADS in 2017, after a planned $50 million issuance in 2016. Pledged sales taxes increased by 5.2% in fiscal 2014 and have proven volatile historically, with large swings consistent with the overall business cycle. Fitch's base case coverage calculations assume no growth in pledged revenues after 2014. Revenues could withstand a 70% decline before falling below 1.0x MADS coverage. Additional bonds are subject to a 2.0x additional bonds test (ABT).
Pledged revenues for the transportation tax revenue bonds include a portion of local sales taxes levied for transportation purposes as well as a $10 per vehicle fee for highway construction and transportation corridor preservation. Such revenues covered annual debt service by a very high 8.5x in 2014; rising amortization results in still-strong MADS coverage of 2.3x. Pledged revenues have increased modestly in the past several years and Fitch's base coverage calculations assume no growth after 2014. Revenues could withstand a 56% decline before falling below 1.0x coverage, assuming no further issuance. Management has no plans to issue any parity transportation tax revenue bonds, which would be subject to a 2.0x ABT.
The excise tax road revenue bonds are supported by annual county fees on vehicles in lieu of property tax (uniform fees) as well as a subordinate lien on per vehicle preservation fees pledged to the transportation tax revenue bonds. Combined coverage from the two revenue sources is very high at 5.3x MADS. Coverage from the senior lien revenues alone is lower but still strong at 2.5x MADS. Pledged revenues have improved modestly over the past several years and Fitch's base coverage calculations assume no growth after 2014. Total revenues could withstand a 59% decline before falling below 1.0x coverage, assuming no further issuance. Management has no plans to issue any parity excise tax road revenue bonds, which would be subject to a 2.0x ABT for total revenues as well as a 1.5x ABT for pledged junior lien revenues.
STRONG LOCAL ECONOMY SET FOR CONTINUED GROWTH
Salt Lake County encompasses a significant portion of the state's total population and economic activity. Local economic indicators are strong overall, with September 2015 unemployment falling to an extremely low 3.1% from 3.3% the year prior due to expanding employment. Unemployment compares well to the nation's 4.8% rate, and is similar to the state.
The county is well positioned for continued population and economic growth given ample developable land, substantial capital investments, and a positive business climate. Fiscal 2015 assessed valuation (AV) levels increased by a robust 6.8%, reflecting new construction and recovering home prices following the housing-led recession.
SOUND FINANCIAL POSITION
The county's financial position is strong, supported by solid general fund reserves, structural balance, and satisfactory liquidity levels. Fiscal 2014 general fund operations produced a $5.6 million surplus, raising the unrestricted fund balance to $54.6 million (19.1% of expenditures and transfers out). Management projects break-even performance for the county's general fund in 2015 and the 2016 budget is balanced.
The county's largest source of revenues is property taxes, which, as mentioned above, are automatically levied at the same level every year, plus new growth, assuming the county adopts its certified tax rate, as is typical. Because this revenue source is not indexed to inflation, the county's long-term financial position likely will depend on the continued willingness of public officials to raise the tax levy from time to time and/or make expenditure cuts to offset inflationary pressures. The county's 'AAA' GO rating reflects Fitch's expectation that the county will continue to raise its property tax levy, as needed, to maintain a solid financial position.
STRONG DEBT PROFILE
The county's total debt burden is low at $1,416 per capita and 1.4% of market value. These strong debt metrics stem in part from the county's significant use of pay-as-you-go capital financing. The county's principal amortizes rapidly, with 42% and 74% of debt retiring in five and 10 years, respectively.
The county participates in the state's well-funded Utah Retirement System (URS). In recent years the state implemented material pension reforms that should slow pension cost growth moving forward. Recessionary investment losses lowered the public employees' non-contributory system's (the largest of the county's systems) funded ratio to somewhat weak levels in recent years, but funded levels rebounded with improved investment returns. Under the assumption of a 7% investment return rate in future years, Fitch estimates that the plan is funded at a healthy 79.7%.
The county's unfunded OPEB liability equals $99.3 million based on the most recent actuarial report, or a modest 0.1% of AV. The county has historically funded OPEB on a pay-as-you-go basis. In fiscal 2013 the county discontinued OPEB benefits for new employees and has recently established an irrevocable trust to address remaining unfunded liabilities.
Carrying costs for debt service and retiree benefits are low at 11% of governmental expenditures. Fitch expects carrying costs to remain low due to recent pension and OPEB reforms, rapid direct debt amortization, and relatively modest borrowing plans.
PRUDENT MANAGEMENT PRACTICES
Fitch views favorably the county's prudent financial management policies and recent years' actions to offset recessionary pressures. Management proactively cut expenditures early in the recession and, although delayed until 2013, increased property tax rates. Financial management policies include a minimum 10% undesignated general fund balance that has regularly been exceeded. Long-term debt is reviewed by a senior committee, and by policy the county uses pay-as-you-go capital financing as its first alternative. State and county reforms to employee benefits should slow related benefit expenditure growth considerably moving forward.
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