Town of West Jefferson, AL 2019 General Obligation Warrants Assigned 'A' Rating

CHICAGO (S&P Global Ratings) Aug. 23, 2019--S&P Global Ratings assigned its 'A' rating to the Town of West Jefferson, Ala.'s series 2019 general obligation (GO) warrants. The outlook is stable.
West Jefferson is poised to benefit from the completion of I-22, which will provide additional traffic through the town and potential increases in sales tax revenues. Although the town has very strong reserves compared to budgeted expenditures, they are nominally low. Furthermore, the local economy is exposed in terms of employment and water sales to a coal-fired power plant, which is generally under threat due to environmental concerns and economic feasibility, given more affordable alternate energy options. The town relies heavily on utility transfers and sales taxes, which typically are more volatile than property taxes.
The warrants constitute a GO of the town, for the payment of which West Jefferson irrevocably pledges its full faith, credit, and taxing power. Property tax pledges in Alabama are limited, and there are statutory tax limitations that include levies for debt service. Although property tax is technically a limited tax, our analysis focuses on the strength of the full-faith-and-credit pledge, which we view as having equal credit quality to an unlimited-tax GO pledge.
"The stable outlook reflects our expectation that the town will continue to maintain at least near-balanced operating results and very strong reserve levels, although they are still what we consider nominally low," said S&P Global Ratings credit analyst Alexander Vargas. We do not expect to change the rating over the outlook's two-year horizon.
We could lower the rating should negative operating results lead to a decrease in reserves. Furthermore, shuttering of the Miller Steam Plant could lead to a downgrade, given the importance of the plant to the town's local economy and water sales, which are used to supplement governmental revenues.
An upgrade would be predicated on West Jefferson expanding its economy such that taxes are able to support governmental operations with no need for transfers from the utility fund. Furthermore, the town would need to build and sustain available reserves above $500,000, which is a level we would no longer consider nominally low.
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