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Fredericksburg City Beat

This blog includes news about City Hall, city schools and other 22401 news.

Pamela Gould reports on City Hall. You can reach her at 540-735-1972 or pgould@freelancestar.com. Robyn Sidersky reports on city schools. You can reach her at 540-374-5413 or rsidersky@freelancestar.com.

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Fitch notes city financial challenges; changes bond rating outlook to negative

On Friday, Fitch Ratings reaffirmed Fredericksburg’s double-A bond rating, but changed the outlook on that rating from "stable" to "negative."

This basically means that Fredericksburg faces some financial challenges that Fitch found significant, and the rating agency will be keeping an eye on them. Read the memo city officials wrote to council members about this action here.

You can read Fitch’s report here. Here’s a key paragraph:

The Outlook revision is primarily a result of the city’s reduced financial flexibility due to substantial declines in general fund reserve levels over the last three fiscal years. These declines are mainly attributable to pay-as-you go capital spending and significant recurring expenditure growth without similarly corresponding increases in revenues. Sales tax revenues are weakening, further pressuring the city’s operating position. A substantial real estate property tax rate increase is necessary to offset value losses from an expected 25% decline in the city’s real estate property taxbase in fiscal 2010 and maintain the previous year’s levy. The city will be pressured over the next several years to structurally balance its budget while maintaining fund balance levels consistent with the rating category. 

If you have been paying attention to Fredericksburg budget discussions over the past three years, then nothing here should be news to you. Very basically, Fitch is worried about the city’s declining sales tax revenues, its use of fund balance in recent years and the anticipated drop in real estate values after this year’s reassessment.

While the city has been spending from its fund balance in recent years, it has not brought that balance below the target it sets in its financial guidelines (12 percent of the prior year’s revenues). That is the case in Stafford County, as reporter Jonas Beals recently wrote.

Fitch is one of three agencies that rate municipal bonds. Standard & Poor’s and Moody’s have not performed the specific analysis of Fredericksburg that Fitch has, but Moody’s earlier this month announced that it had assigned a negative outlook to the bonds of every local government in the country, because of the recession.

This paragraph from a New York Times story on Moody’s action indicates why declining property values may be a concern to Fitch:

The report suggested conflicts ahead between taxpayers struggling to keep their own households afloat and elected officials charged with balancing budgets, making their payrolls and protecting their credit ratings.

“Taxpayers, worried about their own financial condition, are more resistant than ever to increasing property or other local taxes,” the report observed.

 

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Permalink: http://news.fredericksburg.com/citybeat/2009/04/27/fitch-notes-city-financial-challenges-changes-bond-rating-outlook-to-negative/

  • lgross

    involved in this: ” ..Credit rating agencies failed
    to adequately account for large risks (like a
    nationwide collapse of housing values) when
    rating CDOs and other ABSs.”

    http://en.wikipedia.org/wiki/Collateralized_debt_
    obligation

    you know… one of the rating agencies that put a
    “AAA” on the CDOs that consisted of sub-prime
    mortgage securities?

    just asking….

  • tpkeller

    “A substantial real estate property tax rate increase is necessary to offset value losses from an expected 25% decline in the city’s real estate property taxbase…”

    This quote is really stupid. The tax RATE is meaningless. The only number that matters is the actual amount of total tax income levied against all the property in the city. If your property value drops 10% and they raise the tax RATE 10%, the net result is the same. Individual cases may vary by a little bit, but overall, the net difference should be zero.

    Now if the property values drop 10% and they raise the tax RATE 25%, then you’ve got a story.

  • tpkeller

    Oh, please note, my comment is on the Fitch report, not Ms. Battle’s fine reporting! :-)

  • lgross

    it is interesting though because… let’s say that OVERALL, the tax revenue falls 25% as the result of an OVERALL loss of value –
    Aggregate so .. City Council decides to rectify the problem with an equalized tax rate.

    However.. the impact to specific property owners could vary by quite a bit in some circumstances as assessments are affected
    locationally.

    for instance, if a particular neighborhood was affected more than others and had foreclosures.. the loss of value could be higher than
    other …more stable neighborhoods that kept their value.

    In the above scenario.. wouldn’t the more stable neighborhood take more of the hit from an equalized tax rate?

    sounds like mucho fun and games for City Council. NOT!

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