TEXT-Fitch cuts San Rafael, Calif. lease revs to 'AA-'

Dec 11 - Fitch Ratings takes the following actions on San Rafael, California
(the city) bonds:

--$7.4 million San Rafael Joint Powers Authority lease revenue refunding bonds
series 2012 downgraded to 'AA-' from 'AA';
--$5 thousand San Rafael Joint Powers Authority lease revenue bonds series 2003
downgraded to 'AA-' from 'AA'; and
--Implied general obligation (GO) bond rating downgraded to 'AA' from 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by 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 the 2003 issuance
refunded by the 2012 transaction. 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

DOWNGRADE FOLLOWS CALIFORNIA CITIES REVIEW: The downgrade to 'AA' for the city's
implied GOs and 'AA-' for its lease revenue bonds reflects low pension funding
and reserve levels relative to similarly rated entities. Fitch's heightened
sensitivity to compensation-based expenditure pressures is discussed further in
its recent review of California cities (California Cities Snapshot; Revenue
Constraints and Rising Costs Will Continue to Pressure Ratings, Oct. 1, 2012,
available at www.fitchratings.com).

STRONG TAX BASE: San Rafael benefits from a large, diverse and affluent property
tax base that has largely maintained its value despite widespread housing
declines nationally. Assessed valuation levels in 2012 approached $175,000 per
capita. The city's wealth is also reflected in its high income levels, which
exceed state and national averages by substantial margins.

DIVERSE ECONOMY: San Rafael serves as a commercial and employment center within
Marin County, helping to diversify the local economy as well as the revenue
sources upon which the city relies.

SUBSTANTIAL PENSION OBLIGATIONS: Although the city has recently reduced benefits
available to new hires, it faces substantial ongoing costs for employee
pensions, which have contributed to recent strains on the city's finances.

FINANCIAL PROSPECTS UNCERTAIN: Management anticipates breakeven results for 2012
after three years of operating deficits, and the city adopted a balanced budget
for fiscal 2013. However, rising costs for retiree benefits, volatile revenues,
and relatively weak fund balances increase the potential for continued budget
challenges.

LOW DEBT BURDEN: The city's debt levels are low and most debt service costs are
supported by non-general fund sources.

CREDIT PROFILE

STABLE PROPERTY TAX BASE, VOLATILE SALES TAX HISTORY

San Rafael benefits from its location and participation in the greater San
Francisco Bay Area economy, and also serves as a local commercial and employment
center within Marin County, one of the wealthiest counties in the nation. The
city's property tax base has been largely insulated from the recent assessed
valuation declines experienced nationally, with a one-year decline of 1.4% in
2011 followed by a return to growth in 2012. Assessed value for this city of
roughly 58,000 exceeds $10 billion.

Total employment levels and unemployment rates have tracked national averages,
but compare favorably to state averages. Retail sales activity declined sharply
between 2008 and 2010, reducing sales tax receipts by 27%, but rose by 14% in
2011 and has shown continued growth in 2012. The city's reliance on the sales
tax (29% of general fund revenues in 2011) was increased by its voters' approval
of a half-cent general purpose sales tax in 2006, which is set to expire in 2016
unless re-authorized.

PENSION CHALLENGES

In addition to revenue declines, San Rafael's finances have also been strained
by relatively inflexible expenditure requirements. Public safety costs account
for the majority of the city's general fund expenditures, and employer pension
contributions were equal to 54% of salary costs in 2011. The city has made
recent progress in controlling future growth in pension costs by reducing
benefits for new hires, but continues to face a substantial liability for
current employees and retirees.

As of the end of fiscal year 2011, San Rafael reported a $153.8 million unfunded
pension liability with a funded ratio of 63%. This ratio declines to 58% under
Fitch's assumption of 7% investment returns, and will likely decline further
with the incorporation of lower than assumed investment returns. The general
fund portion of the city's annual required pension contribution for fiscal 2011
was equivalent to a high 21% of spending. In 2010 the city issued $4.5 million
in pension obligation bonds (POBs) to defer the budgetary impact of such
expenses.

BUDGET REDUCTIONS

Recent strategies employed by the city to balance its budget have included
reductions in other post-employment benefits, a two-year agreement with labor to
reduce salaries by 4%, and the elimination of a variety of budgeted positions.
For fiscal year 2012, temporary and one-time cuts accounted for 70% of the
city's strategies in eliminating a $4.5 million budget gap (8% of general fund
spending). Management reports that improved revenues allowed San Rafael to
reduce its use of one-time strategies by half in 2012 as compared to budget, but
Fitch expects that rising pension costs and limited revenue-raising
opportunities will continue to challenge city finances.

Fund balances have improved recently despite these budget strains. Unreserved
fund balance rose from a low 3% of general fund spending in 2009 to an adequate
9% in 2010 due to the transfer of $3.7 million of reserves from the city's
general liability and workers compensation funds. Unrestricted fund balance (the
sum of committed, assigned, and unassigned fund balance per GASB 54) reached 11%
of general fund spending at the end of 2011 and appears likely to remain at this
level through fiscal 2012. The city's budget for 2013 maintains fund balances at
current levels.

LOW DEBT

The city's debt profile is strong, with only the 2010 POB issuance directly
supported by the general fund. The 2012 lease revenue refunding bonds are
supported by a general fund pledge to covenant and appropriate for lease
payments, but as planned in the original 2003 issuance, the city has used
parking revenues to meet all debt service requirements. Overlapping debt levels
are low, at 1.5% of assessed value, reflecting the city's strong property tax
base.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in the Tax-Supported Rating
Criteria, this action was additionally informed by information from Creditscope,
University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global
Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria