OREANDA-NEWS. January 26, 2016. Fitch Ratings has affirmed the rating on the following Pleasant Grove City, Utah (the city) excise tax revenue bonds at 'A+':

--\\$1.9 million, series 2008.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien pledge on Class C road revenues, which principally consist of a flat tax on gallons of motor fuel sold, safety inspection fees, vehicle registration fees, and other highway user charges collected statewide. Municipal distributions of revenue are based 50% on population and 50% on Class B and C road mileage, subject to annual appropriation by the state legislature. There is a cash funded debt service reserve funded to the IRS maximum.

KEY RATING DRIVERS

SPECIAL REVENUE STATUS LIKELY: Fitch considers the motor fuel tax revenue stream to be a 'special revenue' under the U.S. bankruptcy code definition and therefore does not consider the city's general credit quality to be a limiting factor for the rating.

ADEQUATE DEBT SERVICE COVERAGE: Debt service coverage from fiscal 2015 pledged revenue was 1.3x. The city has limited legal capacity for additional parity indebtedness given a 1.25x additional bonds test. Existing coverage levels provide an adequate cushion against actual historical revenue losses.

NARROW TAX COLLECTED STATEWIDE: Pledged revenues are derived from a narrow range of economic activities on a statewide basis. Pledged revenues have exhibited a moderate level of volatility historically, but should benefit in the near term from a recent moderate increase in the gas tax rate.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: The rating may shift should future or anticipated debt service coverage vary materially and sustainably from recent levels.

CREDIT PROFILE

Pleasant Grove encompasses nine square miles with a population of 37,000 residents in Utah County, 12 miles north of Provo and 35 miles south of Salt Lake City.

SPECIAL REVENUE STATUS IS LIKELY

Fitch views the pledged motor fuel tax revenue as special revenues under section 902(2)(B) of the bankruptcy code, which defines 'special excise taxes imposed on particular activities or transactions' as special revenues. Therefore, the rating is not capped by the city's general credit quality. Fitch believes special revenue status is unaffected by the state's, rather than the city's, responsibility for the levy, collection, and appropriation of the revenues to the city, or the state's discretion as to the distribution of the revenues among local government units.

Given that the distribution of pledged funds is subject to annual appropriation by the state, the rating on the bonds is capped at one notch below Utah's general obligation bond rating (currently 'AAA'/Stable Outlook).

In further support of the likelihood that the bonds would not be subject to an automatic stay in a bankruptcy proceeding the bonds were issued for a specific rather than a general purpose of the city, the city's share of the state-distributed revenues are deposited into a separate fund apart from the city's general fund, and the revenues are dedicated to debt service and transportation projects and not available to other creditors of the city.

There is no bankruptcy opinion that addresses the special revenue status of the pledged funds, and Fitch is not aware of a bankruptcy in which state-levied excise taxes were involved.

SATISFACTORY DEBT SERVICE COVERAGE

Coverage of maximum annual debt service stood at an adequate 1.31x in fiscal 2015, up moderately from 1.23x in fiscal 2014 and 1.29x in 2013. Fiscal 2014 revenues dropped 4.2% from the year prior. Management attributes the dip to the expansion of population and road mileage elsewhere in the state, which contracts the proportion of revenues that the city receives. Fiscal 2015 revenues returned to growth, up 5.8% on the year to \\$1 million, the highest allocation of Class C Road revenues to the city since before the bonds were issued in 2007. The fuel tax component of pledged revenues account for 83% of total pledged revenue; MADS coverage absent the registration and other motor vehicle-based fees is 1.07x in fiscal 2015.

Fitch estimates Class C Road revenues would have to decline a cumulative 23.4% from fiscal 2015 levels for annual debt service coverage to reach 1.0x. By comparison, the revenue stream's largest recessionary decline was 13.2% in fiscal 2009. Fitch also estimates that revenues would have to decline by more than 12.5% annually through final maturity in fiscal 2018 for coverage to drop below 1.0x.

Management expects modest growth in Class C Road revenues moving forward, based on a 4.9 cent increase in the state gas tax to 29.4 cents per gallon effective Jan. 1, 2016, the first such increase in 18 years. The city expects to collect an additional \\$175 thousand per year as a result of the increase. This projected increase over fiscal 2015 revenues would increase fiscal 2016 debt service to 1.53x. Debt service is level in fiscal 2016 and 2017 at roughly \\$770 thousand before declining to \\$557 thousand in fiscal 2018, the year of scheduled final maturity.