Fitch Ratings said it downgraded to AA-minus from AA San Rafael, Calif.'s $7.4 million Joint Powers Authority lease revenue refunding bonds series 2012; $5,000 Joint Powers Authority lease revenue bonds series 2003; and the city's implied general obligation bond rating to AA from AA-plus.

The rating outlook is stable.

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.

The downgrade to AA for the city's implied GOs and AA-minus 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.

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.

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.

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.

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.

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

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