Fitch Downgrades Town of Fairfax, CA's GOs to 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings takes the following action on the Town of Fairfax, California's outstanding general obligation (GO) bonds:

--$1.5 million GO bonds series 2006 downgraded to 'AA' from 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by unlimited ad valorem taxes on all taxable property within the town.

KEY RATING DRIVERS

REDUCED FINANCIAL FLEXIBILITY: The downgrade is primarily based on declines in general fund reserves since Fitch's last review, which decrease the town's ability to address unforeseen financial challenges.

IMPROVING REVENUES: The town's revenue base has continued to perform well with ongoing increases in sales and property tax receipts. Continued strong performance will hinge on renewal of a parcel tax to be considered by voters in November 2014.

MANAGEABLE LONG-TERM OBLIGATIONS: Debt ratios are moderate and no new issuances are planned. The town makes the annual required contribution to its pension plan and has a very affordable unfunded other post-employment benefits liability.

RESILIENT LOCAL ECONOMY: The town benefits from its participation in the broad and diverse San Francisco Bay Area regional economy and exhibits above average wealth levels, low unemployment, and a stable real estate market.

WEAK DISCLOSURE PRACTICES: Audited financial statements are routinely completed more than 12 months following the end of the fiscal year and are not made available through secondary market disclosure channels.

RATING SENSITIVITIES

FURTHER FUND BALANCE DECLINES: Additional declines in unrestricted fund balances would put downward pressure on the rating.

CREDIT PROFILE

The town of Fairfax is a residential community of about 7,400 located in the southern portion of affluent Marin County, approximately 20 miles north of San Francisco. The resilient local economy benefits from its location and participation in the economically diverse San Francisco Bay Area. Unemployment rates in the county remain low at 3.9% as of April 2014, as compared to state and national averages of 7.3% and 5.9%, respectively. Wealth levels in Fairfax are above average with per capita and median household incomes at 177% and 186%, respectively, of the national average.

REDUCED FINANCIAL FLEXIBILITY

The town's financial position has weakened since Fitch's 2012 review, with operating deficits after transfers in three consecutive fiscal years (2011 through 2013). Management reports positive results for fiscal 2014, but reserves appear likely to remain at reduced levels. Unreserved fund balance of $2.9 million at the end of 2010 was equivalent to 40.6% of general fund spending, but declined to $1.5 million (unaudited) at the end of fiscal 2013, or approximately 20.8% of general fund spending. Management reports that fund balance draws are due in part to increased capital spending; nonetheless Fitch believes current levels make the town's overall risk profile more consistent with the 'AA' rating level, particularly given the small nominal size of reserves.

Additional risks to financial flexibility include the upcoming expirations of voter-approved parcel and sales taxes in 2015 and 2017. Town voters will consider the renewal of parcel taxes dedicated to public safety, capital, and pension expenses in November 2014; an election loss would threaten approximately 8% of general fund revenues. Management has demonstrated an ability and willingness to make budgetary adjustments as necessary to address deficits during prior downturns, but the town's small size and workforce limit options for reducing spending.

STRONG REVENUES

General fund revenues remained relatively stable during the recent recession, dipping by a moderate 4.3% in fiscal 2010 before returning to growth in subsequent years. The town's strong property tax base is a key factor in these results, as was the approval by voters of a temporary half-cent sales tax in 2011. Management reports further revenue increases for fiscal 2014 and projects additional gains in 2015 based on assessed value (AV) growth of 4.1% and continued strong sales tax performance.

WEAK DISCLOSURE PRACTICES

Audited financial statements for fiscal 2013 were not available at the time of this review and the town has a history of late filings. A search of the Municipal Securities Rulemaking Board's EMMA reporting system found no evidence of secondary market disclosure filings by the town.

MANAGEABLE LIABILITIES

Overlapping debt is moderate at $3,349 per capita and 2.4% of fiscal 2013 AV. Amortization of direct debt is above average with 62% of outstanding principal repaid within 10 years. Capital needs include several aging bridges which the town hopes to replace with federal and state support; no new debt issuances are anticipated.

The town participates in a statewide pension plan, fully funds its annual required contribution, and will see rising contribution rates for most employees over the next several years. Pension costs for new hires are sharply lower as a result of new benefit tiers, and may offset a portion of this increased expense. Unfunded liabilities for retiree health care are low at less than 0.1% of AV. Carrying costs for debt service and retiree benefits are moderate at approximately 17.7% of 2012 governmental expenditures.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Zillow.com.

Applicable Criteria and Related Research:

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

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=854774

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1 415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1 415-732-5617
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1 415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1 415-732-5617
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com