Dec 21 - Fitch Ratings downgrades the following Glenwood Springs Rural Fire Protection District, Colorado (the district) bonds: --$495,000 limited tax general obligation (LTGO) bonds to 'BBB-' from 'BBB'. The Rating Outlook is revised to Negative from Stable. SECURITY The bonds are secured by pledged revenues from a levy on all taxable property within the district at a rate not to exceed 3.126 mills. KEY RATING DRIVERS OUTLOOK NEGATIVE: The downgrade and Outlook revision to Negative from Stable reflects Fitch's expectation that financial operations will likely deteriorate based on the adopted fiscal 2013 budget gap along with a projected assessed value decline affecting revenues in fiscal 2014. INADEQUATE MILL LEVY: The district's current operational mill levy of 6.339 mills is inadequate to sustain the current level of fire protection and ambulance services. No additional taxing margin exists under the general operating levy cap and reserves have been nearly depleted. SERVICE CONSOLIDATION UNCERTAIN: District management's decision to move forward with a proposal to share equipment and consolidate services with neighboring fire districts has been delayed indefinitely. The potential shift in structure creates uncertainty as to the district's future operational and financial position. CONSISTENT OPERATING IMBALANCE: Operating deficits were habitual over the last 10 years, and the budgeted deficit for fiscal 2013 is projected to draw down the already nominal operating reserve. MANAGEABLE DEBT BURDEN: Positive credit considerations include the district's limited, essential purpose; ample capacity to raise the debt service millage; and a low overall debt burden with no plans for additional issuance. WHAT COULD TRIGGER A RATING ACTION FUND BALANCE DEPLETION: Lack of resolution of the ongoing structural budget imbalance and depletion of the already thin fund balance likely will result in further negative rating action. CREDIT PROFILE The district spans 67 square miles in unincorporated Garfield County in northwestern Colorado, approximately 160 miles west of Denver. The district's population is estimated at 4,200 as of 2010. It is an independent taxing entity with limited functions, and operates under an intergovernmental agreement (IGA) with the city of Glenwood Springs, whereby the city provides fire protection and ambulance service in return for a proportional share of the district's property tax revenues. OPERATIONAL STRUCTURAL IMBALANCE CONTINUES The rating downgrade to 'BBB-' reflects the district's chronic financial operating imbalances and nearly depleted reserves. By fiscal 2010 year-end, the total general fund balance had declined precipitously to a negligible $23,000 or just 3% of total spending, from $304,000, or 67% of spending in fiscal 2004. Fiscal 2010 reflected the eighth consecutive annual operating deficit. This sustained structural imbalance prompted Fitch to take downward rating action in February 2011. Fiscal 2011 audited results were positive, reinforcing reserves modestly up to 15% of spending, but preliminary fiscal 2012 results show another imbalance. Management expects an operating deficit of $52,000 or 8.5% of spending, due primarily to the large 22% decline of district assessed values affecting the district's primary revenue source. Fiscal 2012 total fund balance is expected to drop to a small $43,000 or 7% of spending. MORE FISCAL CHALLENGES AHEAD Budget stabilization remains a challenge for the future due to constrained revenue growth and rising fire protection costs. Revenue constraints are caused in part by the district's limited operational mill levy. The district is currently levying at its cap of 6.339 mills, which cannot be increased without voter approval. Also, the IGA with the city is adjusted annually to accommodate the city's rising fire protection costs. The fiscal 2013 budget is imbalanced, with another drawdown of reserves planned to near-depleted levels of approximately 2.5% of spending. COST-CUTTING MEASURES NEEDED; TAX RATE INCREASE PROPOSED Plans to join a regional fire authority with neighboring fire districts have been tabled. The district is still considering the option, as it promises to create greater cost-sharing efficiencies between the participants. However, if the district joins the authority, the IGA with the city would be discontinued since the city elected not to join the fire authority at this time. As an alternative, the district's board is considering plans to propose to voters a tax rate increase in November 2013. Preliminary proposals would increase the mill levy cap from its current rate of 6.339 mills to 7.5 mills while maintaining the IGA with the city, or as high as 8.2 mills without the IGA. Management will determine the exact tax rate increase needed as future cost estimates are realized leading up to the election. Fitch would view the success of either of these proposals positively, as they would provide greater financial flexibility and improve the prospect of regaining structural balance. Management states that voters in neighboring areas approved similar tax rate increases this year, and they consider the prospects for the district to be good. Fitch's concern is that the district's plan for structural balance hinges, at least in part, on factors outside of management's direct control, namely the willingness of district voters to approve a tax rate increase. ANOTHER AV DECLINE IN 2014 ANTICIPATED District assessed values have been volatile in the last few years, increasing by 34% in 2010, dropping by 22% in 2012 and expanding by 3% in 2013. Significant construction of single family homes spurred growth for most of the last decade, and then recessionary pressures lowered reassessed housing and vacant land values beginning in 2012. Management reports that the next reassessment -- affecting collections in 2014 -- is expected to show another large decline of as much as 20%. Actual preliminary values will be reported in August 2013, and are certified in December. Under this loss scenario, assuming no voter-approved tax rate increase, the district stands to lose approximately $95,000 in operating revenue, or 17% of total general fund revenues. MANAGEABLE DEBT BURDEN Debt levels are low, and principal payout is rapid. Final maturity for all outstanding debt is in 2019, and management reports no plans for further debt issuance. Debt service carrying costs are also low at 13% of total spending. Debt service revenue can withstand stringent stress and still maintain adequate coverage. With the current debt service rate at 1.13 mills (well below the cap of 3.126 mills) the district's AV could withstand as much as a 61% drop from current levels and debt service would still be covered. The district has no direct pension or other post-employment benefit liabilities, as there are no district employees. The district's indirect liability for city workers is minimal given that most firefighters are volunteers and receive nominal post-employment benefits.