Fitch Ratings takes the following rating action on the City of Pleasant Grove, Utah's sales tax revenue bonds as part of its continuous surveillance effort:
--Approximately $5.5 million sales tax revenue bonds, series 2002 affirmed at 'AA-'.
The Rating Outlook is Stable.
Fitch will recalibrate the ratings on the above referenced bonds on April 30, 2010 as described in the March 25, 2010 report 'Recalibration of U.S. Public Finance Ratings', available at www.fitchratings.com. At that time the ratings will be revised as described below.
--The rating on the sales tax revenue bonds will be revised to 'AA' with a Stable Outlook.
RATING RATIONALE:
--The 'AA-' rating reflects high debt service coverage levels, the breadth of the sales tax, a state-wide distribution formula that somewhat mitigates local economic fluctuations, and a restrictive 2.5 times (x) additional bonds test (ABT).
--The rating also reflects the city's currently strong, albeit softening, financial position, exhibited by high reserve levels and prudent management practices.
--The local economy benefits from its proximity to the Salt Lake City and Provo employment markets.
--Unemployment and poverty levels remain low, however the housing market recently has shown signs of stress.
--The debt profile is good overall, with low to moderate net debt levels, very fast amortization, and manageable capital needs; however, a return to previously high population growth rates could pressure capital needs in the future.
--The property tax base is highly diversified and has grown briskly through the years, though a modest decline is expected in 2010.
KEY RATING DRIVER(S):
--Maintenance of a strong financial position in spite of economic weakening.
--Prudent management of the city's capital improvement plan, especially if population growth resumes at historical levels.
SECURITY:
Bonds are payable solely from, and secured solely by, a pledge of revenues from the 1% local sales and use tax on all taxable sales of goods and services, disbursed by the Utah State Tax Commission to the city. The taxes are collected state-wide, but disbursed based on a formula that equally weighs a city's population and local sales tax generation.
CREDIT SUMMARY:
Pleasant Grove lies in Utah County, encompassing nine square miles with a population of approximately 33,800 residents. 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 a recent reduction in new residential construction.
Although unemployment spiked 62% year over year, December unemployment was still low at 4.7%. Poverty rates and median household income levels are better than state and national averages and taxpayer concentration is low. The city's housing market performance is somewhat better than the national average, but foreclosure rates have risen significantly.
Debt service coverage remains quite high in spite of a 9.3% reduction of sales tax revenues in fiscal 2009. Sales tax revenues in fiscal 2010 are estimated to drop a further 3.5%, which would reduce coverage to a still robust 6.2x maximum annual debt service (MADS) from 6.4x the year prior. A restrictive 2.5x MADS ABT and the city's reliance on excess sales tax revenues to meet ongoing expenditures mitigate the risk of future leverage weighing excessively on coverage.
The city's financial operations are currently strong, but revenue pressures are causing a modest degree of deterioration. In fiscal 2009 general fund operations produced a $3 million deficit compared to spending of $16.7 million, largely reflecting restricted balance spend-down. The unreserved balance fell by a more moderate $1 million after a $700,000 transfer out to capital projects. The ending unreserved fund balance stood at a high $4.5 million (25.6% of expenditures and transfers out). However, when the transferable balance from the capital projects fund is considered, the city's unreserved financial cushion rises to 34% of expenditures. Management expects that fiscal 2010 operations will produce a deficit of $500,000-$600,000, reflecting a challenging sales tax environment. Management prudently cut $1.1 million in expenditures in fiscal 2009, and $237,000 in 2010 to mitigate falling tax revenues. Reductions included one-time capital deferrals, wage freezes and employee reductions. The city generates a diversified mixture of revenue streams, with the largest shares represented by charges for services (27% of fiscal 2009 revenues) and sales taxes (24%).
The city's debt profile is solid overall, with quick amortization and a manageable capital plan. Net debt levels are low to moderate at 3.3% of market value ($2,428 per capita). While capital needs are currently manageable, a return to historically high population growth could expand the city's capital improvement plan.
Applicable criteria available on Fitch's web site at www.fitchratings.com include:
'Rating Guidelines for Special Tax Bonds,' dated July 14, 2009.
'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.
'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at www.fitchratings.com.
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