As part of ongoing surveillance, Fitch Ratings has downgraded the rating on San Rafael Joint Powers Authority, California's $7 million outstanding lease revenue bonds (issued for the City of San Rafael), series 2003 to 'AA-' from 'AA'. The Rating Outlook is revised to Stable from Negative.
The 'AA-' rating reflects San Rafael's (the city) covenant to budget and appropriate lease payments and its strong general credit characteristics. Strong credit fundamentals include the city's location and participation within the greater San Francisco area employment base, its large, wealthy, and diverse $10 billion tax base, and low debt burden. The downgrade is primarily based on a reduction in general fund financial flexibility from historically high levels. The Stable Outlook reflects Fitch's expectation that the city will prove successful in stabilizing financial operations despite meaningful expenditure pressures.
The fiscal 2008 general fund unreserved balance totaled $4 million, or 6.6% of the budget. While these levels are still solid, they represent a significant decline from prior years as revenues have not kept pace with expenditure growth. Fiscal 2009 estimates show another decline in the unreserved balance to a lower 3% of spending due to off-budget sales tax revenues, the city's primary revenue source. Ad valorem taxes, the second largest revenue stream, have remained predictably stable as the city is a mature, upper-income community that has demonstrated recent tax base stability.
Public safety remains the city's largest expenditure item. Annual pension contributions comprised roughly 18% of the city's annual general fund (GF) budget in 2008, with similar projections over the next several years. Fitch believes the comparatively high pension costs will continue to restrict budget flexibility and liquidity on a going forward basis, especially in light of a currently strained revenue environment. Fitch views as a credit strength the city's willingness to balance the fiscal 2010 budget with expenditure adjustments and just a slight draw on reserves. If revenue growth is slow to materialize, the city could face additional budget shortfalls.
Lease payments are paid from parking revenues. The leased asset, a new parking facility in the central downtown area, was completed in early 2005, and as anticipated, replaced city hall as the leased asset. The Parking Services Fund generated $4 million in income in FY 2008, covering expenses, including lease payments, by almost $1 million after transfers. The city does not have any general obligation (GO) bonds outstanding, though it may seek voter authorization for up to $88 million in GO bonds for various public safety projects.
San Rafael (population 58,000) is located in Marin County - a northern suburb of San Francisco - along the Highway 101 corridor. The city is almost entirely developed, consisting of upscale residences and a vibrant downtown community, and serves as a retail hub for the surrounding communities. The city's unemployment rate, historically below state and national norms, has experienced recent increases to around 9%. Wealth levels are considerably higher than the state and nation. The city's $10 billion tax base grew at a 5.5% compound annual growth rate from 2002 through 2009. For 2010, growth was lower but still positive at 1.34%.
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Contacts:
Fitch Ratings
Andrew DeStefano, 212-908-0284, New York
Scott
Monroe, 415-732-5618, San Francisco
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
