Fitch Rates Cedar Hills, UT GOs 'AA-'; Outlook Stable
Fitch Ratings has assigned the following rating to City of Cedar Hills, Utah (the city) obligations:
--$5.625 million general obligation (GO) refunding bonds, series 2012.
The bonds will be sold via competitive on or around Dec. 4, 2012. Proceeds will be used to advance refund outstanding GO refunding bonds, series 2005, maturing after Feb. 1, 2016, which were issued to help finance the acquisition and construction of the Cedar Hills golf course.
The Rating Outlook is Stable.
The bonds are secured by ad valorem taxes to be levied without limitation as to rate or amount on all taxable property in the city.
KEY RATING DRIVERS
GOOD FINANCIAL POSITION: The city has maintained good reserves, including 18% unrestricted general fund balances the past two years and excess reserves in the capital projects fund, some of which have been used to support golf course operations.
MANAGEMENT TURNOVER: The city management team is mostly new with the recent departures of the mayor, finance director, city manager, and other staff.
DIVERSE REVENUE SOURCES: The city benefits from a diverse revenue stream with no source making up more than 30% percent of general fund revenues.
STABLE ECONOMY: The affluent city is primarily residential with increasing commercial development and access to the Salt Lake City and Provo employment centers.
MODERATE DEBT LEVELS: The city's moderate debt levels, which are primarily related to its golf course, are likely to decrease over time as the city intends to continue financing capital needs through pay-go sources.
WHAT COULD TRIGGER A RATING ACTION
STABLE MANAGEMENT, LIMITED GOLF COURSE SUPPORT: An upgrade may be triggered by stability in the city's management and maintenance of general fund and capital projects fund support of the golf course within current expectations.
STABLE ECONOMY WITH GROWING COMMERCIAL SECTOR
The affluent bedroom community of Cedar Hills is located approximately 26 miles south of Salt Lake City and 8 miles north of Provo at the foot of the Wasatch Front mountain range. The population of about 10,000 has increased over 200% in the past decade. It is currently about 85% built out with a growing commercial sector. However, due to the primarily residential nature of the city, its top 10 taxpayers make up a low 6% of taxable assessed value (TAV). TAV has declined in each of the last three years, for a combined reduction of 26% since 2008. The city expects a slight decline TAV in fiscal year 2012 before stabilizing thereafter.
Accessible from the I-15 via the Timpanogos Highway (State Road 92), the city benefits from its proximity to employment centers of Salt Lake City and Provo. Unemployment is low at 4.5% as of September 2012, lower than state and national averages. Median household income is high at 75% over the state average and 90% above the national while per capita incomes are on par with the state. The city is highly education with over 50% of its adult population possessing a bachelor's degree, about twice the national average.
GOOD FINANCIAL POSITION and DIVERSE REVENUE STREAM
The city's overall financial profile is good with an unaudited fiscal year 2012 unreserved fund balance of 18.9% and a ratio of cash to liabilities of 1.7. State code limits the general fund unreserved balance to 18% of revenues. The city maintains sizable reserves in the capital projects fund as well, with over $2 million in unrestricted fund balance the past several years that can be used for general fund purposes if necessary.
The city's revenue stream is diverse and includes sales taxes, which comprise 30% of general fund revenues, and property taxes at 24%. Sales taxes have increased 36% over the past five years, primarily due to increasing commercial development, including a Walmart in 2008. Sales taxes are collected by the state and distributed monthly according to a formula that provides that 50% of the 1% of local sales and use tax revenues is remitted based on the municipality's population and 50% on the point-of-sale basis.
Property taxes have remained very stable due to the state law that adjusts the tax rate annually to hold revenues harmless. The city has not increased the tax rate above that amount for at least the past decade and has quite a bit of flexibility to increase the rate to the state limit of $0.007 per $1,000 if needed, although it has no plans to do so.
City management currently appears stable after a recent departure of the mayor, finance director, and city manager. While such a big turnover is of concern with regard to the relationship between officials and community residents, Fitch expects more stability in management going forward and notes the current city's manager's long tenure with the city.
SUPPORT OF GOLF COURSE
While overall operations are good, the ongoing support of the golf course fund by the general fund and capital projects fund is a concern if it increases beyond anticipated levels. The support is through small direct operating subsidies in two of the last ten years and a $2 million loan from the capital projects fund to the golf course fund to reconfigure the course to create saleable lots and to bridge accumulated deficits.
The golf course loan has grown from about $200,000 in fiscal year 2004 to $2 million in fiscal year 2012. The city plans to repay the loan in part through the sale of residential lots created from the reconfiguration on the golf course property, currently valued at around $600,000. Proceeds of the sale of certain other lots totalling an estimated $2 million must be used for mandatory redemption of the GO bonds. Finally, the city recently used about $2.3 million in restricted impact fees from the capital projects fund to build a community recreation center on the golf course. The golf course fund has had operating losses in each of the last nine fiscal years.
MODERATE DEBT LEVELS
Overall debt levels are moderate on a per capita basis at $2,000 and moderately high as a percent of full market value at 3.3%. However, given the lack of additional borrowing plans and expectation of pay-go for capital projects, the debt levels are likely to decline over time. Amortization of principal is moderate, with a ten year principal payout of 43%.
The city's carrying costs are moderate, with debt service accounting for 17% of spending (general fund, capital projects fund, and golf course fund) and pension costs accounting for 4%. The state pension plan is adequately funded at 74% using a Fitch adjusted discount rate. In addition, the city does not offer other post-employment benefits.
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
U.S. Local Government Tax-Supported Rating Criteria
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