Fitch Affirms Salt Lake City RDA, UT's Tax Increment Revs at 'AA'; Outlook Stable
--\\$64.7 million taxable tax increment revenue bonds (Performing Arts Center Project), series 2013.
The Rating Outlook is Stable.
The bonds are payable from 40% of property tax increment revenues generated within the Central Business District project area and 75% of property tax increment revenues generated within the Block 70 Community Development project area. This includes portions of tax increment revenue from Salt Lake City (the city), Salt Lake County, and the Salt Lake School District dedicated through interlocal agreements to the repayment of the 2013 bonds.
KEY RATING DRIVERS
CREDIT ENHANCED BY CITY'S MORAL OBLIGATION: The 'AA' bond rating reflects Fitch's evaluation of the bonds' underlying credit characteristics as enhanced by the city's agreement to assist with tax increment revenue shortfalls by considering appropriation of the shortfall amount as a loan to the agency via the annual budget process.
SOLID DEBT SERVICE COVERAGE: Tax increment provides sound coverage; in the event of widespread assessed value (AV) declines, tax increment revenues are protected by automatic adjustments in the certified tax rate. However, pledged revenues are subject to changes in tax rates by the city or its underlying and overlapping taxing units.
NARROW TAX BASE HAS OFFSETTING STRENGTHS: While small, the project areas are centrally located. As a consequence, they benefit from ongoing capital investment in the city's strong commercial sector, have an extremely high incremental value (IV) to base year ratio, and have a history of very limited property tax appeals.
MODERATE DEBT PROFILE: The agency's direct debt is moderately low as measured by debt service coverage. The 1.50x additional bonds test provides satisfactory protection against overleveraging, and there are no plans to issue further debt.
The rating is sensitive to shifts in the city's 'AAA' GO bond rating, the city's commitment to make up debt service deficiencies, and maintenance of debt service coverage well above the 1.50x additional bonds test. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
SOLID DEBT SERVICE COVERAGE
In fiscal 2014, debt service coverage without subordinate pass-throughs was very strong at 3.66x senior maximum annual debt service (MADS) and 2.29x senior and subordinate MADS. As a stress test, applying the most recent tax increment revenue declines to all future years (down 1.6% in FYs 2007 and 2008 combined) would reduce senior MADS coverage to a still solid 2.23x by fiscal 2031 final maturity. A high 60.5% decline in AV from the fiscal 2016 level would be required to drop debt service coverage to 1.00x senior MADS assuming no additional issuance. These debt service coverage calculations are based solely on property tax increment revenues generated within the Central Business District project area since development within the Block 70 Community Development project area is awaiting completion.
The additional bonds test requires 1.50x aggregate annual debt service coverage. In May 2015, the agency issued \\$13.3 million in privately placed subordinate bonds (not rated by Fitch), with a 15 year maturity. This reduces total MADS debt service coverage slightly to 2.28x, still leaving a moderate amount of additional issuance capacity. The agency has no near-term plans to issue additional debt.
CITY'S MORAL OBLIGATION
In the event pledged tax increment revenues are ever insufficient to repay the bonds, the city agrees to assist the agency by requesting city council approval, as part of the annual budget process, to appropriate the shortfall amount as a loan to the agency. The agency would be obligated to repay the city such loans from future tax increment revenues on a subordinate basis. However, appropriation remains discretionary for the city council, and the city cannot be sued by bondholders if it fails to appropriate sufficient moneys.
Fitch believes the city (GO bond rating of 'AAA', Rating Outlook Stable) has sufficient financial flexibility and liquidity to readily absorb such an unforeseen funding requirement. (For more information about the city's rating, see 'Fitch Rates Salt Lake City, Utah General Obligation Bonds 'AAA' and Upgrades Sales Tax Revenue Bonds to 'AAA'; Outlook Stable', Dec. 10, 2014.) The city has a strong ongoing involvement with the new Utah Performing Arts Center project, which was funded with proceeds of the series 2013 bonds. Construction of the performing arts center is on schedule and the grand opening is scheduled for September 2016. Further, the membership of the agency's board and the city council are the same.
This is the city's second moral obligation pledge; an earlier one relates to a much smaller debt (\\$10.9 million outstanding in privately placed Salt Lake City Housing Authority bonds). Neither moral obligation is publicly reported in the city's annual financial disclosures. The city is considering the most accurate way to reflect these moral obligations in its future financial statements.
NARROW TAX BASE WITH A STRONG COMMERCIAL SECTOR
Taxpayer concentration is high, with the top taxpayer representing 29% of AV, while the top 10 taxpayers collectively represent a very high 61%. However, tenant diversity helps offset the high taxpayer concentration. The project areas are supported by stable long-term tenants in their Class A and B office buildings. The base of tax increment revenue-generating property is also narrow at only 114.4 acres. Nevertheless, the Central Business District and Block 70 Community Development project areas are located in the heart of downtown Salt Lake City and, as a consequence, benefit from considerable ongoing economic development, reflecting the strength of the city's commercial sector.
The Central Business District project area is the agency's most active, with average annual AV and IV growth rates of 5.5% and 6.1% respectively during fiscal years 2006-2016. The IV of \\$1.9 billion is 13.76x the project area's base year value of \\$136.9 million. The project area extends to 2040, nine years after the series 2013's final maturity. Of this project area's 260 acres, 100 acres are allowed under statutory limitations to generate tax increment. These 100 acres include the project area's most high-profile recent development, the 23-acre mixed-use City Creek development, with a fiscal 2015 AV of approximately \\$577 million. City Creek's AV is likely to increase as all of its component buildings become fully built out and occupied.
The 14.4-acre Block 70 Community Development project area, in which the Utah Performing Arts Center will be located, was established in February 2013 with a base-year AV of \\$58.8 million. Projected tax increment revenues from the Class A office building under construction immediately adjacent to the Utah Performing Arts Center are not included in the pro forma debt service coverage calculations.
MINIMAL OPERATIONS RISK
As a capital financing entity which aligns its capital program with available resources, the agency's financial operations pose minimal risk. The agency is entirely funded by tax increment and self-generated revenues from land sales and loans.
The agency receives a portion of the composite tax rate, which is the aggregation of tax rates established by the taxing entities within each of the Central Business District project area (the agency's share is 40%) and the Block 70 Community Development project area (the agency's share is 75%). Tax increment revenues are protected from citywide, countywide, and school district-wide AV declines by automatic adjustments in the certified tax rate under a 2004 Taxing Entity Committee agreement. However, the tax increment revenue stream is somewhat vulnerable to taxing entities lowering their tax rates. In addition, net decreases in the value of specific parcels located in the project areas could result in decreased tax increment revenues.
For financial management purposes, the agency is treated as an enterprise department of the city. The agency has no exposure to variable rate debt obligations or swap agreements, manageable pension and OPEB liabilities, and no material indirect risks, contingent liabilities, or pending litigation.