Standard & Poor's has changed its outlook on Fairfield, Calif.'s pension obligation bonds long-term A rating to negative from stable due to the city's projected large budget gap.
"We base the negative outlook on the city's large historical and projected structural deficit absent the approval of a local sales tax measure," S&P said in the report Wednesday.
The city's adopted budget for fiscal 2013 includes an operating deficit of $2 million, or 3% of costs, despite a $1.5 million increase in sales tax revenues and $6.7 million of cost reductions, the ratings agency said in the report.
Over the next three fiscal years, according to the ratings agency, Fairfield is projecting an average deficit of $7.8 million.
City officials hope to help eliminate the deficit by getting voters to approve a 1% sales tax hike, which they project could generate between $12 million and $13 million a year in new revenue.
Fairfield, with a population of more than 100,000 located between San Francisco and Sacramento, has been struggling with an unemployment rate at 11% amid a slow economic recovery.
The city has experienced the extreme boom bust housing cycle like many other California municipalities over the last decade.
The city's taxable assessed property values, excluding redevelopment incremental value, fell nearly 16% between fiscal 2008 and fiscal 2011, but stabilizing this fiscal year, according to Standard & Poor's.
If the tax measure passes in November, the rating agency said officials would aim to keep city services unchanged, but if it fails, it would expect to cut police and fire jobs and reduce services.
Standard & Poor's called Fairfield's overall debt burden "moderate" at $3,339 per capita.
"We could lower the ratings in the next year if the tax measure fails and the city does not address its structural deficits," the report said. "We could revise the outlook to stable in the next year if the city maintains available general fund reserves we consider good."