Fitch Affirms Midvale Municipal Building Authority, UT's Lease Revs at 'A+'; Outlook Stable

Fitch Ratings has affirmed the following Municipal Building Authority of Midvale City, Utah bond rating:

--$7.8 million lease revenue bonds (City Hall Project), series 2012 at 'A+'.

Fitch also has affirmed the Midvale City (UT) implied unlimited tax general obligation (ULTGO) bond rating of 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by lease rental payments made by the city, subject to annual appropriation, in an amount sufficient to pay annual principal and interest.

KEY RATING DRIVERS

STABLE, WELL-MANAGED COMMUNITY WITH HEALTHY FINANCES: The city benefits from strong, tenured management, healthy finances, manageable debt, a stable population base, a well-located retail sector, a mature tax base with good growth potential, and proximity to the economic hub of Salt Lake City.

PROACTIVE EXPENDITURE REDUCTIONS: Transferring the city's police and fire service obligations to other organizations has generated significant ongoing general fund savings in the near term. However, the resulting reduction in the city's property tax rate has reduced one of the city's most stable general fund revenue sources, leaving the general fund proportionately more exposed to economically sensitive and volatile revenue sources.

EXPOSURE TO EXTERNAL DEBT PRESSURES: The police and fire savings, projected increases in sales and use tax revenues, and considerable flexibility to raise future property tax rates will help fund the city's share of the growing liability for Utah Telecommunications Open Infrastructure Agency (UTOPIA) and Utah Infrastructure Agency (UIA) underperformance. A public/private partnership proposal going before voters in November 2014 might reduce the city's commitment.

GROWTH LIKELY TO ALLEVIATE LOWER SOCIOECONOMIC CHARACTERISTICS: While the city's socioeconomic characteristics tend to be below average, with the notable exception of the unemployment rate, the city's good growth potential will likely improve the city's socioeconomic profile over time.

KEY ESSENTIAL LEASED ASSET: The rating on the 2012 bonds is a single-notch below the city's implied ULTGO reflecting the annual appropriation legal structure and bondholder's leasehold security interest in several essential governmental facilities, namely a new city hall and justice court building.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's healthy financial position, manageable debt, and strong retail sector. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Midvale City covers 5.9 square miles in the middle of the Wasatch Front, Utah's largest population and commercial center, and approximately 10 miles south of Salt Lake City.

RESIDENTIAL COMMUNITY WITH A SIGNIFICANT BUSINESS COMPONENT

The city is a predominantly residential community with a stable population of around 31,000 and a significant commercial component comprising 2,158 businesses. The city serves as a retail hub for wealthy surrounding communities and provides 963 hotel rooms servicing the nearby ski area. As a result of the strength of the city's retail sector, the city is currently a net exporter of sales and use tax revenues under the state's formula which distributes 50% of sales and use tax revenues on the basis of point of sale and 50% on the basis of population.

Approximately 10% of the city's total land area remains developable, located largely on two former superfund sites immediately west of the major Interstate-15 artery. While the northern site continues to experience new residential and commercial construction, the southern site has no development at the present time.

After four years of AV declines during the recession resulting in a 10.9% cumulative loss, AV has more than rebounded. As a result of recovering market values and new residential and commercial developments, the city has seen significant increases in fiscal years 2014 (4.7%) and 2015 (9%). The city's top 10 property taxpayers represented 15.1% of the fiscal 2013 tax base. This moderate level of concentration is somewhat offset by the mix of retail, commercial real estate, and residential real estate holdings, and a large mineral processing firm.

The city's below-average income and wealth characteristics likely reflect the disproportionately large elderly population, and young families attracted by housing which is more affordable to rent or purchase than in surrounding communities. The very low June 2014 unemployment rate of 3.8% (down from 4.6% a year prior) is in line with the state (3.9%) and well below the nation (6.3%).

HEALTHY FINANCES WITH EXPOSURE TO VOLATILE REVENUE SOURCES

The city's total general fund balance goal is 15% of general fund revenues. The city allowed its total general fund balance to fall below 15% in fiscal years 2010 and 2011 to avoid increasing property taxes during the recession. However, it replenished the total general fund balance in fiscal 2012 (20.2%), which declined somewhat in fiscal 2013 (16.1%). The city transfers excess revenues to its capital projects fund to meet its pay-as-you-go capital improvement programming (total fund balance of $1.7 million at fiscal 2013 year end).

The city ended fiscal 2013 with a healthy unrestricted general fund balance of $2.7 million or 14.8% of spending. Its unaudited fiscal 2014 unrestricted general fund balance shows a $300,000 increase to $3 million or 19.5% of spending.

While the city's general fund is performing well, it is exposed to volatile revenue sources. Forty-two percent of the city's budgeted fiscal 2015 general fund revenues are expected to derive from sales and use taxes, and 19% from franchise fees, energy sales and use taxes, and hotel taxes. Cumulatively, this represents a significant general fund reliance (61%) on revenues that historically have proven volatile given their sensitivity to the economy. For example, sales and use tax revenues declined by 21% during fiscal years 2008-2010. Sales and use taxpayers are somewhat concentrated with the top 10 generating approximately 35% of fiscal 2013 sales and use tax revenues.

Conversely, property tax revenues represent a stabilizing revenue source. Under Utah law, if property TAV declines, the property tax rate increases commensurately to maintain the city's revenue stability. However, for Midvale this stabilizing affect is smaller than for comparably sized cities because property tax revenues represent only 7% of its budgeted fiscal 2015 general fund revenues. Midvale significantly reduced its property tax rate after the transfer of fire services to the Salt Lake Valley Fire Service Association (SLVFSA). The city has the ability to increase property taxes in the future without an election.

The city achieved considerable expenditure savings from both its contract since 2011 with the Unified Police Department (UPD) and its membership since 2012 in the SLVFSA. Contracting with the UPD for police services, rather than staffing its own department, is currently saving the city $800,000 per year. The city wants to increase those savings going forward. Fitch notes, however, that UPD contract savings are subject to future service provision decisions and cost increases by the UPD. Being a member of the SLVFSA rather than staffing its own fire department is saving the city a further $1.3 million per year. These cumulative annual savings of $2.1 million are helping the city to both protect its general fund balance and to meet its rising obligations connected to UTOPIA and UIA, discussed below.

STRONG DEBT PROFILE BUT RISING EXTERNAL DEBT PRESSURES

The city benefits from an affordable debt profile, with an overall debt per capita of $2,059 or a moderate 3.8% of market valuation. Direct debt principal amortizes at a moderately swift 65.2% in 10 years. No further general fund supported debt issuances are planned in the medium term. The city makes its full pension system contributions each year and does not have other post-employment benefit liabilities. The city's total debt, pension, retirement health savings plan, UTOPIA and UIA carrying costs were a manageable 16.7% of total governmental spending in fiscal 2013.

UTOPIA is an interlocal agency comprising 11 pledging and five non-pledging Utah cities which owns and operates a fiber optic infrastructure leased to private internet service providers. Eleven cities pledge sales and use tax revenues to partially guarantee payment of UTOPIA's bonds in the event that UTOPIA generates insufficient net revenues. In addition, eight of the 11 pledging cities also participate in the UIA interlocal cooperative agreement, pledging sales and use tax revenue towards their share of any debt service fund shortfall. As a member of both UTOPIA and UIA, Midvale's sales and tax revenues are pledged to its share of any UTOPIA and UIA debt service fund shortfalls created by insufficient net revenues. While any amounts paid by the city are loans to be repaid by UTOPIA and UIA, it is currently unclear when UTOPIA and UIA will be in a position to repay such loans. UTOPIA has a current negative net worth of $145.9 million.

As of June 30, 2013, the city's percentage of the UTOPIA debt service reserve shortfall was 6.06% of $56 million ($3.4 million). The city's annual commitment increases by 2% per year, ranging from $795,600 in FY 2014 to $1,329,152 in FY 2040, to be paid out of the general fund. The anticipated UIA pledge amount is 6.6% of any future annual debt service shortfall with a yearly liability capped at $339,988. The city has not had to make any UIA payments to date.

While the city expects to fund these growing external obligations from projected sales and use tax revenue increases and the savings from transferring sworn personnel out of the city, it also has the option to raise property taxes if necessary. In November 2014, voters in six of the 11 UTOPIA pledging cities will determine if they agree with entering into a public/private partnership supported by a monthly utility fee payable by all households in return for better baseline internet services. If successful, Midvale would stop making its annual $125,000 payment to support annual UTOPIA operating expenses (this is over and above its debt service fund support payments).

KEY ESSENTIAL LEASED ASSET

The series 2012 bonds have standard legal protections for bondholders, including a bond-funded debt service reserve fund and various insurance requirements for the city and the design and construction contractors. The leased assets being constructed with the bond proceeds are a mixture of essential (a new city hall/justice court building into which the city is about to move), less essential (street lights), and non-essential (a new park). All projects are located on city-owned land. Annual appropriation is on an 'all or nothing' basis so that the city cannot choose to appropriate for just the essential asset. The bonds provide for capitalized interest well beyond the expected construction period, with the first principal payment not due until Oct. 15, 2016.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=875894

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