Fitch rates Park City a AA+Rating affirmed for wealth and low debt of city budgets
March 27, 2012
Financial markets grow best in a stable environment, and Park City is just that. Fitch Rating, one of the top three global rating agencies, affirmed the area’s general obligation bonds as AA+ for the second time in the city’s history last week, helping to cement the area’s reputation as a solid investment.
"What this rating shows is just how good the community has been able to weather a downturned economy," said Nate Rockwood of the Park City Municipal Corporation Budget Department.
The AA+ rating is the second highest that can be awarded, with the AAA rating as the highest. Compared state wide, other popular tourism destinations such as Moab or St. George have no rating in place. The only city that holds a AAA rating in Utah from Fitch is Salt Lake City, the capital of the state.
"It’s pretty complicated, when we’re talking about compiling a rating," said Jessalynn Moro, the Fitch Secondary Analyst to Park City’s most recent rate. "You’re really looking at overall credit profile of the city, the local economy. No one factor equals a AA rating. It’s always a culmination."
Other comparable resort towns in the country, cities such as Aspen, Vail, Stowe and Jackson Hole, have no Fitch Ratings.
In the downturned economy more than one municipality has lost its GO bond rating, especially in depressed areas such as California and Nevada, where real estate markets were among the worst in the nation.
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"Property values, while they have dipped, haven’t dipped as drastically as other communities," Rockwood said, "but for a resort community like us to have such a highly managed financial system, it is definitely a feather we can put in our cap. We’ve been able to maintain that capability despite our smaller size."
Both high unemployment and sinking home values have led to decreased revenues for municipalities, all symptoms of a weakened economy. With less cash in city coffers and more cuts, municipality credit scores dropped across the nation. While upgrades and downgrades both increased from 2010 to 2011, upgrades are still below levels from before 2008. In 2011 alone, Fitch Rating downgraded 268 municipalities, a 63 percent increase from the year before. Fitch upgrades only increased by 26 percent from 2010 to 2011.
"Across the board, we’re seeing higher unemployment than we had," Moro said. "There are definitely varying levels of housing market stress. Everything people are reading about in press those factors all play into rating.
"What’s interesting about local government is that the effects of economic changes tend to lag in showing up in their financial statements."
However, most municipality ratings, including Park City, were affirmed with Fitch’s Stable Rating Outlooks.
From the time property taxes, the primary source to pay General Obligation Bonds, are scheduled to the time the taxes are levied, the economy could have depressed home values. Revenue hits could take two years to show up, Moro said.
"Even though many places are in recovery, the local government is still struggling to balance the budget," she added. "In a case like Park City, the town benefits from having diversity in its revenue stream."
Park City Municipal currently has 13 bonds out, and five of the 13 are GO Bonds, which are generally issued for specific public work projects. In Park City’s case, the bonds went toward park improvements, buying open space and increasing the walkability of the area.
According to the Fitch report, Park City has strong financial flexibility which is reflected in its diverse revenue base, balanced budget, near-maximum reserves, a history of pay-as-you-go capital projects and the ability to increase various tax revenues, if needed.
"I think it’s obvious how a higher rating can impact you," Rockwood said. "You’re saving money by having a higher rate. When we went out to sell a bond, the Park City name and history was able to get us good deal on the interest. We’re able to borrow money at a much lower rate."
What’s a bond?
A bond is a loan, and when an investor purchases a bond that is an investment in the bond’s interest rates over time. The better rating an organization, corporation or city has, the better the interest rate levels can be negotiated. That’s all a bond is a loan. How much and how often an investor is paid interest depends on the terms of the bond.
So how is Park City Doing today with all three of the top rating agencies?
PARK CITY PROFILE FROM FITCH RATING
The bonds are secured by an unlimited ad valorem tax on all taxable property within the city. The Park City GO Bond Rating was affirmed as stable.
STRONG FINANCIAL FLEXIBILITY: The city’s strong financial flexibility reflects a diverse revenue base, balanced financial operations, reserves maintained near maximum legal levels, a history of significant pay-as-you-go financing of capital projects, and the ability to increase various tax revenues, if necessary. The city also benefits from prudent financial policies and conservative budgeting practices.
MIXED DEBT PROFILE: Overall debt ratios are extremely high on a per capita basis but low as a percentage of assessed value (AV), reflecting the city’s relatively small permanent population, large number of visitors and temporary residents, and high property values.
CONCENTRATED ECONOMY: The local economy is highly concentrated in tourism and leisure activities, but benefits from high wealth levels, below-average unemployment, and its proximity to the greater Salt Lake City area.
GROWING TAX BASE: The city’s AV continues to grow with gains in the last two years completely offsetting the one year of recorded loss in fiscal 2010.
HEALTHY RESERVES AND BALANCED FINANCES:
The city’s unrestricted fund balance increased to $4.2 million or a solid 18.3 percent of spending in fiscal 2011. General fund reserves are close to the maximum amount allowed under Utah state law, which requires cities to maintain an unassigned general fund balance greater than 5 percent and no more than 18 percent of expected revenues. The city’s capital project fund has a sizable balance of $27 million in fiscal 2011.
Financial performance remained balanced in fiscals 2010 and 2011 with operating surpluses of $148,000 (0.6 percent of spending) and $345,000 (1.5 percent), respectively.
Management projects a small operating surplus in fiscal 2012, which Fitch views as reasonable given property and sales tax outperformance compared to budgeted figures.
The city benefits from a diverse revenue base. In fiscal 2011 property taxes contributed $8.6 million or 40 percent of revenue, with resort tax and sales tax each contributing approximately 18 percent. Property tax revenues remain stable, as the city regularly adopts the certified property tax rate, which increases or decreases each year to generate the same amount of revenue as the previous year. The city could raise the general property tax levy by Council vote following a mandatory series of public hearings. While the city does not intend to raise its property tax levy in the near future, Fitch views this additional revenue raising capacity favorably.
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, the affirmation was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight and the National Association of Realtors.