Fitch Affirms Salt Lake County, UT's GOs at 'AAA'; Outlook Stable

Fitch Ratings has affirmed Salt Lake County, Utah's (the county) bonds as noted below:

-- $235 million general obligation bonds (GOs) at 'AAA';

-- $73 million lease revenue bonds (LRBs) series 2009A & 2009B, issued by the Salt Lake County Municipal Building Authority, Utah (the authority) at 'AA+';

-- $76 million sales tax revenue bonds series 2010D and sales tax revenue refunding bonds 2012A at 'AA+';

-- $74 million transportation tax revenue bonds, series 2010A and 2010B (federally taxable - issuer subsidy - Build America Bonds) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GOs are secured by an unlimited property tax levied on all taxable property in the county. The LRBs are secured by payments from the county to the authority for use of various leased assets, subject to abatement. The sales tax revenue bonds are secured by county option sales and use tax revenues collected and distributed by the state. The transportation tax revenue bonds are secured by state highway fund revenues received by the county pursuant to an interlocal cooperation agreement with the state.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The county's financial position benefits from a solid general fund balance, structurally balanced operations after a fiscal 2013 property tax hike, satisfactory liquidity, and prudent financial management practices. However, out-year inflationary expenditure pressures could outstrip projected revenue gains absent further tax increases or expenditure cuts.

SOLID AND DIVERSE ECONOMY: The regional economy is large, diverse, and well-poised for long-term growth. Unemployment is very low, home prices are continuing to recover, albeit at a reduced rate, and large-scale private and governmental capital investments are continuing.

STRONG DEBT PROFILE: Debt levels are low and direct principal amortization is rapid. Manageable capital needs will mostly be funded on a pay-as-you-go basis, debt plans are affordable, and the county's primary pension system is well-funded with no significant rate increases anticipated from current levels.

PRUDENT MANAGEMENT PRACTICES: Financial management policies are sound, as demonstrated by conservative budgeting practices, recent years' OPEB reforms, significant use of pay-as-you-go capital financing, and a prudent minimum reserve level that has been regularly exceeded.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's strong economy, debt profile, and financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

STRONG ECONOMY WELL-POSITIONED FOR LONG-TERM EXPANSION

Salt Lake County encompasses a significant portion of the state's total population and economic activity. Local economic indicators are strong overall, with May unemployment falling to an extremely low 3.1% and employment expanding by a solid clip of 3.4% year-over-year. Both metrics are materially healthier than the nation and are roughly in line with the state of Utah.

The county is well positioned for continued population and economic growth given ample developable land, substantial capital investments, and a positive business climate. Fiscal 2013 assessed valuation (AV) levels increased a moderate 3%, ending a multi-year tax base contraction caused by the housing-led recession. However, the county recently reached a settlement with its top taxpayer, Kennecott Copper, resulting in a substantial $1.7 billion (42.5%) reduction of the taxpayer's AV. AV gained just 0.5% after adjusting for the appeal.

The county typically adopts its certified tax rate, which is the tax rate required to achieve the prior year's tax levy, plus new growth. This approach limits upside revenue potential in an expansion, but stabilizes revenues in a declining AV environment. As a result, the Kennecott appeal will not cause a reduction of the county's property tax revenues. Rather, the remainder of the tax base will absorb a relatively minor tax rate increase to offset the appeal.

SOUND FINANCIAL POSITION

The county's financial position is strong, exhibited by solid general fund reserves, structural balance, and satisfactory liquidity levels. Fiscal 2013 general fund operations produced an $8.5 million surplus, raising the unrestricted fund balance to $49.3 million (18.1% of expenditures and transfers out).

In fiscal 2014 general fund operations are budgeted to produce a $10 million deficit; however, the county historically has budgeted quite conservatively. Management estimates actual operations will produce a substantially smaller deficit, and that operations are structurally balanced net of pay-as-you-go spending on one-time capital projects.

The county's largest source of revenues derives from property taxes, which, as mentioned above, are levied at the same level every year, plus new growth. Because this revenue source is not indexed to inflation, the county's structural balance may turn to a deficit position if expenditures grow at a higher rate than total revenues. As a result, the county's long-term financial position likely will depend on the continued willingness of public officials to raise the tax levy from time to time and/or make expenditure cuts to offset inflationary pressures. The county's 'AAA' GO rating reflects Fitch's expectation that the county will continue to raise its property tax levy, as needed, to maintain a solid financial position.

STRONG DEBT PROFILE

The county's total debt burden is low at $1,396 per capita and 1.4% of market value. The county's principal amortizes rapidly, with 41% and 71% of debt retiring in five and 10 years, respectively. These strong debt metrics stem in part from the county's significant use of pay-as-you-go capital financing.

The county participates in the state's well-funded Utah Retirement System (URS). In recent years the state implemented material pension reforms that will slow pension cost growth moving forward. Recessionary investment losses lowered the public employees' non-contributory system's (the largest of the county's systems) funded ratio to somewhat weak levels in recent years, but investment returns in fiscal 2013 raised funded levels to 85.3%. Fitch assumes a standardized 7% investment return rate (the system assumes 7.5%), which lowers the funded ratio to an estimated, satisfactory 80.9%. The system uses a five-year smoothing period, so recent years' investment losses have been incorporated into fiscal 2014 contribution rates and management does not anticipate rate increases from current levels.

The county's unfunded OPEB liability equals $99.3 million, or a modest 0.1% of AV. The county has historically funded OPEB on a pay-as-you-go basis. In fiscal 2013 the county discontinued OPEB benefits for new employees and has since set aside $1.8 million to pre-fund its obligation, though an irrevocable trust has not been established. Management is considering other reforms that could reduce the county's OPEB liability from current levels.

The county's carrying costs (debt service, pension ARC, and OPEB costs over total governmental fund spending) equal a low 13%. Carrying costs are likely to remain at low levels due to recent years' pension and OPEB reforms, rapid direct debt amortization, and relatively modest borrowing plans.

STRONG SALES, TRANSPORTATION TAX COVERAGE LEVELS

The 'AA+' rating for the sales tax revenue bonds reflects very strong debt service coverage provided by pledged sales and use tax revenues and a solid 2x maximum annual debt service (MADS) additional bonds test. Fiscal 2013 sales tax revenues of $49 million covered pro forma MADS a strong 3.7x, inclusive of a projected $30 million parity issuance later this year. Fitch estimates that sales tax revenues would have to decline by a severe 75% for MADS coverage to reach 1x. Based on recent county-wide economic performance, management estimates sales tax revenue gains of 3.4% and 4.9% in fiscal years 2014 and 2015, respectively. A second sales tax revenue bond issuance preliminarily sized to $35 million projected to be issued late next year is not expected to materially reduce coverage levels from currently very high levels.

The 'AA' rating for the transportation tax revenue bonds reflects solid debt service coverage provided by pledged highway fund revenues. Fiscal 2013 revenues of $25.3 million covered annual debt service by a very high 5.35x. Due to escalating debt service, MADS coverage is lower at 2.39x, but still solid. Pledged revenues have performed well since the end of the recession, growing an estimated cumulative 18% from their fiscal 2010 trough to fiscal 2014. Fitch estimates pledged revenues would need to decline 55% for MADS coverage to reach 1x. Management has no plans to issue any parity transportation tax revenue bonds.

PRUDENT MANAGEMENT PRACTICES

Fitch views favorably the county's prudent financial management policies and recent years' actions to offset recessionary pressures. Management proactively cut expenditures early in the recession and, although delayed until 2013, increased property tax rates. Financial management policies include a minimum 10% undesignated general fund balance that has regularly been exceeded. Long-term debt is reviewed by a senior committee, and by policy the county uses pay-as-you-go capital financing as its first alternative. State and county reforms to employee benefits will materially slow related benefit expenditure growth moving forward.

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, and Zillow.com.

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=887614

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