Fitch Affirms Pleasant Grove, UT's Excise Tax Revs at 'A+'; Outlook Stable
March 15 2012 - 1:27PM
Business Wire
Fitch Ratings affirms the following Pleasant Grove, Utah (the
city) bonds:
--$4.3 million excise tax road bonds, series 2008 'A+'.
The Rating Outlook is Stable.
SECURITYThe bonds are secured by a first lien pledge on Class C
road revenues. They are considered a special limited obligation
payable only by the revenues, and do not constitute a debt of the
city. The majority of such revenues historically have been composed
of gas taxes, though other sources include taxes and fees on
highway use, safety inspections, vehicle registrations, and others.
Distributions of the revenues are based 50% on population and 50%
on Class B and C road mileage. There is a cash funded debt service
reserve funded to the IRS standard.
KEY RATING DRIVERS
SATISFACTORY DEBT SERVICE COVERAGE: The 'A+' rating reflects the
bonds' satisfactory debt service coverage levels, rapid
amortization, the relatively narrow nature of the tax, a moderate
degree of historical revenue volatility, and an adequate 1.25 times
(x) additional bonds test (ABT).
IMPROVING FINANCIAL POSITION: The rating also reflects the
city's improving financial operations, exhibited by balanced
operations before transfers out for capital, a diversified revenue
stream, solid fund balance levels, year of prudent expenditure
reductions, and an expected operating surplus in fiscal 2012.
RESILIENT ECONOMY: Located close to the Provo employment market,
the city benefits from a low unemployment rate, resilient health
care and education sectors, and an expanding local employment
base.
DIVERSE, PRESSURED TAX BASE: Although the city's property tax
base is diverse, it has faced two years of modest contraction
resulting from declining home prices.
GOOD DEBT PROFILE: Debt levels are moderate, capital needs are
manageable, and debt amortizes rapidly.
CREDIT PROFILE
OVERALL SOUND ECONOMIC CONDITIONSPleasant Grove (Fitch implied
GO rating of 'AA') encompasses nine square miles with a population
of 33,500 residents in Utah County. The city's economy benefits
from its proximity to expanding employment centers in Salt Lake
City and Provo, and from several freeways that converge nearby. As
a result, the city's population growth historically has been very
high, although growth has slowed due to the housing-led recession.
Declining home values have lowered the city's assessed valuation
(AV) by a moderate cumulative 7% from fiscal 2009-2011. Because the
city's tax rate generally floats to achieve a pre-determined tax
levy, fluctuating AV generally does not directly impact property
tax revenues.
The city's economy has been performing well despite a pressured
housing market. December unemployment fell an impressive 23.6% year
over year to just 4.2% versus 5.5% the year prior. During the same
period employment grew at about four and two times the state and
national rates, respectively, while the labor force also expanded.
Household income levels are above state and national averages, and
the poverty rate is well below state and national levels.
ADEQUATE DEBT SERVICE COVERAGEPledged excise tax revenues in
fiscal 2011 covered maximum annual debt service (MADS) a
satisfactory 1.30x. Debt service coverage has benefitted from two
years of pledged revenue growth in excess of 6%. However,
historical revenue performance has been volatile. Fiscal 2009
coverage fell to just 1.15x MADS due to a substantial 13.2% revenue
loss that year. For fiscal 2012 management is estimating a modest
1.4% revenue gain, which Fitch believes is reasonable in light of
the city's historical budgeting conservatism. Based on Fitch's
stress scenarios, 2011 pledged revenues could decline 4% annually
and revenues would be sufficient to repay the debt. Alternatively,
2011 pledged revenues could withstand a one-time revenue decline of
up to 24% in 2012 and revenues would still be sufficient to service
the debt. The additional bonds test is adequate with historical
revenues at least 1.25x pro forma average annual debt service.
SOUND FINANCIAL POSITIONThe city's financial position is sound
despite generating general fund operating deficits after transfers
for the past three fiscal years. Audited general fund operations
produced a $1.9 million operating deficit (after transfers) in
fiscal 2011, lowering the total and unrestricted fund balances to
still sound levels of $4.2 million (25% of expenditures and
transfers out) and $2 million (12%). However, the fund balance
drawdown in fiscal 2011 consisted of large one-time transfers out
for capital intended to lower the fund balance below the 18% legal
cap set by the state. Management indicated that ongoing operations
in fiscal 2011 were structurally balanced. Management also
anticipates a $250,000 operating surplus (before transfers out for
capital) in fiscal 2012. Fitch believes such a surplus is realistic
given management's historically conservative budgeting
practices.
GOOD DEBT PROFILEThe city's debt burden is moderate, with net
and overlapping debt equaling $2,107 per capita, or 3.2% of market
value. Debt amortization is rapid, with 50% and 77% of principal
paid down over five and 10 years, respectively. Capital needs are
manageable, and the city does not have any plans to issue debt in
the near term. The city phased out its OPEB plan, which has a very
small remaining liability, and the city's pension contributions
seem manageable with the 2011 actuarially required contribution
equaling 5.3% of general fund expenditures.
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
Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898U.S.
Local Government Tax-Supported Rating
Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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