SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following San Rafael, California (the city) bonds:
--$5.7 million San Rafael Joint Powers Authority lease revenue refunding bonds series 2012 at 'AA-';
--Issuer Default Rating (IDR) at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from lease rental payments from the city to the San Rafael Joint Powers Financing Authority, subject to abatement, for use and occupancy of a downtown parking structure constructed with the proceeds of a 2003 issuance refunded by the 2012 bonds. The city has covenanted to annually budget and appropriate for lease payments from the city's general funds, but has agreed to first use parking fund revenues for this purpose. The parking enterprise is self-supporting and has funded the annual lease payments since issuance.
KEY RATING DRIVERS
The 'AA' IDR reflects the city's low long-term liabilities, solid expenditure control, and adequate reserves. Recent revenue performance has been strong but the city's reliance on sales tax and limited legal ability to raise revenues presents an ongoing challenge.
Economic Resource Base
San Rafael is a largely residential community as well as a commercial and retail center for Marin County, located directly north of San Francisco. Wealth and income levels are above average and property values are among the highest in the state. Residents share access to the region's diverse employment base and unemployment levels have historically been below state and national averages.
Revenue Framework: 'a' factor assessment
Revenues have grown steadily in recent years due to a growing tax base and strong retail sales, but the city's legal ability to raise revenues is constrained by Proposition 13, which requires voter approval for tax increases.
Expenditure Framework: 'aa' factor assessment
The city, with a moderate fixed cost burden, has demonstrated a solid ability to manage spending at times of economic and revenue decline. On average, growth in spending is likely to be in line with revenue growth over time.
Long-Term Liability Burden: 'aaa' factor assessment
The city participates in an adequately funded county pension plan and funds the bulk of its capital needs from current resources, resulting in a long-term liability total that is low relative to its substantial resource base.
Operating Performance: 'aa' factor assessment
Reserve levels are currently adequate to address a moderate recession scenario but the city's reliance on sales tax increases its exposure to economic volatility. Management has made consistent efforts to improve financial flexibility in the wake of the recession.
RATING SENSITIVITIES
IDR SENSITIVE TO FINANCIAL PERFORMANCE: The 'AA' IDR could come under downward pressure if the city fails to maintain satisfactory financial flexibility, including reserves sufficient to address periodic economic volatility.
CREDIT PROFILE
San Rafael is the county seat of Marin County and is located approximately 15 miles north of San Francisco. It is a generally suburban community with a population of 59,000.
Revenue Framework
Property and sales taxes comprise the majority of city revenues. Property tax growth has historically been modest but steady, while sales taxes have proven more volatile.
Revenue growth has exceeded U.S. economic performance historically and prospects for further growth appear solid.
The state constitution requires voter approval of tax increases, limiting the ability of the city to control revenues. Property tax growth is constrained by a fixed tax rate and an annual limit on assessed value increases on taxable property absent a change in ownership.
City voters approved a 20-year sales tax increase in 2013 which has contributed to recent revenue gains.
Expenditure Framework
The city provides a broad range of municipal services with public safety accounting for the majority of general fund expenditures.
Based on the city's current spending profile, such costs are likely to be in line with to moderately above expected revenue growth.
The city's ability to reduce expenditures is somewhat constrained by its relatively high share of costs for public safety and pension contributions. In practice, however, management was able to reduce spending through layoffs and furloughs during the last recession, and would likely return to such strategies if needed to address new revenue declines.
Long-Term Liability Burden
Long-term liabilities including overall debt and pension liabilities are low relative to the city's substantial resource base, and direct debt levels are minimal. The city participates in a county-sponsored pension plan and funding levels are adequate.
The city fully funds its annual required contribution for retiree health benefits and has established an irrevocable reserve with a balance equal to 37% of accrued liabilities at the end of fiscal 2013.
Operating Performance
Reserve margin requirements for the city are somewhat high relative to similarly-rated credits due to the city's history of revenue volatility. Fitch expects long-term reserve levels to remain near the city's 10% policy level. In a downturn, financial operations would be more challenged than is the case for more highly rated entities, but the city would likely restore financial flexibility quickly.
The city has made good progress since the last recession in improving financial flexibility, and has notably restored internal service fund balances previously transferred to the general fund. Voter-approved sales taxes have also been set aside to support planned capital improvements.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1007921
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007921
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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.