Fitch Affirms West Valley City, UT's Sales Tax & Lease Revs Bonds; Outlook Negative

SAN FRANCISCO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the following ratings for West Valley City, Utah (the city) and West Valley City Municipal Building Authority, Utah (the authority):

--$10.2 million sales tax revenue bonds, series 2001A, 2002C, 2008A at 'AA';

--$34 million lease revenue bonds, series 2006A and 2006B at 'A+'.

The Rating Outlook on all obligations is Negative.

SECURITY

The sales tax bonds are secured by a senior lien on local sales and use tax revenues currently levied at the maximum rate.

The lease revenue bonds are secured by lease rental payments by the city to the authority, subject to annual appropriation. Leased assets are cross-collateralized pursuant to a master lease, and are subject to surrender by the city in the event of non-appropriation. The bulk of the 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: Expenditure cuts contributed to a strong $3.2 million operating surplus in fiscal 2011 which improved the unrestricted fund balance to $7.8 million or 14.7% of total spending (operating expenditures and transfers out).

FISCAL 2012 BUDGETED DEFICIT: Conservative expenditure forecasting combined with improving sales tax receipts are expected to minimize a $3 million budgeted use of fund balance in fiscal 2012.

STRONG SALES TAX COVERAGE: Senior lien sales tax coverage is strong and performs well under various Fitch stress scenarios.

CONTINGENT LIABILITY EXPOSURE: The city is obligated to make increasing annual payments for its share of a multi-city broadband project, the Utah Telecommunications Open Infrastructure Agency (UTOPIA), which was originally expected to be self-supporting. In addition, the city increased its potential debt payments by a recent borrowing for a hotel project.

STABLE ECONOMY: The city benefits from its location within the relatively strong and diversified Salt Lake City metro area. Unemployment rates are improved, and assessed valuation (AV) declines have softened.

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.

WHAT COULD TRIGGER A RATING ACTION

INABILITY TO MAINTAIN SOLID RESERVES: Maintaining a solid unreserved fund balance in order to provide a cushion for the continuing debt service payments for UTOPIA and potential payments for the hotel project is key to preserving the rating at the current level.

CREDIT PROFILE

IMPROVED OPERATING PERFORMANCE IN FISCAL 2011

The city's financial position strengthened in fiscal 2011 with a $3.2 million operating surplus (after transfers), equivalent to 4.8% of total spending. Revenues remained fairly stagnant but were offset by a $5.8 million or 9.2% decline in operating expenditures from the year prior. The unrestricted general fund balance (consisting of committed, assigned and unassigned funds per GASB 54) for fiscal 2011 was $7.8 million or 14.7% of total spending.

The operating surplus in fiscal 2011 follows three consecutive years of deficit operating results that lowered the unreserved fund balance from $11.9 million or 16.6% of spending in fiscal 2006 to $4.1 million or 4.9% in fiscal 2010. Management noted that the city could move about $2.5 from the capital projects fund to the general fund if needed for additional flexibility.

In fiscal 2012 the city has budgeted a $268,000 use of fund balance and projected revenues are $1.5 less than budget. Salary savings from open positions and conservative expenditure forecasting generally result in approximately $2 million in savings relative to the budget that, along with better than projected sales tax performance, should minimize the drawdown in fiscal 2012.

SIGNIFICANT PROPERTY TAX INCREASE NECESSARY TO OFFSET UTOPIA COST

The city's three main revenue sources are property taxes, accounting for 34% of general fund revenues, sales taxes 28%, and franchise taxes 14%. In fiscal 2012 the city increased its tax rate a significant 18% to 0.00451 to yield an additional $3.5 million in revenue which will be used in part to cover increased costs associated with UTOPIA, the multi-city broadband project.

West Valley City is the largest of 11 participants in UTOPIA. The city has pledged sales and use taxes revenues, on a subordinate basis to its own sales tax revenue bonds, to partially guarantee payment of UTOPIA's bonds. The city has budget $3.8 million to the project in fiscal 2012, and cannot exceed $4.13 million while the city's 2010 lease revenue bonds, which mature in fiscal 2021, remain outstanding. The city's property tax rate remains well below the maximum rate of 0.007, and lower than Salt Lake City's.

STRONG SALES TAX COVERAGE

Following declines of 8% and 15% in fiscal 2010 and 2009, respectively, sales tax revenues increased 4% in fiscal 2011 to $18.2 million or 19.1 times (x) senior debt service. Coverage on an all-in basis, including the subordinate obligation to the UTOPIA bonds, was also strong at 4.1x. Maximum annual debt service (MADS) coverage on an all-in basis is tighter at 1.6x. Sales tax revenue can decline nearly 40% before MADS coverage falls below 1.0x. No additional leveraging is expected.

MIXED DEBT RATIOS

The city's overall debt burden is moderate at $2,739 per capita but a high 6.7% of market value. Debt ratios include the city's share of UTOPIA's $185 million outstanding bonds as well as a recent loan. The city, through its redevelopment agency, borrowed about $32 million to finance a hotel project it expects will be self-supporting from developer payments. Annual debt service payments of $2.4 million, if not funded by the developer as planned, would place further strain on the city's budget, which has already absorbed the increasing UTOPIA debt service payments.

Amortization is average as 56% of principal, not including UTOPIA debt, is retired within 10 years. The city makes its annual required contribution to the state pension fund, which is generally well funded. The city has no other post employment benefits liability.

PROXIMITY TO SALT LAKE

The city benefits from its location in Salt Lake County (rated 'AAA' by Fitch) directly southwest of Salt Lake City. With an estimated population of about 130,000, the state's second largest city constitutes a significant portion of the state's trade and commerce.

The city's tax base has been hit as the economic downturn reduced certified tax rate values by a combined 12% in fiscals 2009 and 2010 and an additional 2.4% in fiscal 2011. Unemployment at 7.2% in December 2011 is lower than national levels and has improved at a much faster rate than nationally, but remains above the state average. The city has a number of redevelopment projects underway, including the renovation and expansion of the Valley Fair Mall.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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