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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