2009-01-30 00:22:06 -

In the course of routine surveillance, Fitch Ratings downgrades the City of Balch Springs, TX's $4 million in general obligation (GO) refunding bonds (series 2003) and $4.9 million in certificates of participation (COPs) (series 2003) to 'BBB' from 'BBB+'. The Rating Outlook is revised to Stable from Negative.


The rating downgrade reflects Balch Springs' (the city) recent weak financial performance and growing reliance on short-term borrowings for operational purposes. The city's financial instability originated in a previous administration's placement of priority on cutting property tax rates which have gradually been restored to previous levels. Positive unaudited fiscal 2008 results and a conservatively planned fiscal 2009 budget suggest the city's financial position has stabilized, aided by continued solid growth

in its property tax base and the recent expansion of its sales tax levy. The achievement of structural balance in the city's finances is key to maintaining credit quality.


Although the city posted operating surpluses in two of the last three fiscal years, this trend was enabled by the growing reliance on short-term borrowings. Most recently, fiscal 2007's surplus of $597,000 was aided by over $1 million in short-term borrowings, over one-half of which did not mature until the following fiscal period. This enabled fiscal 2006's very modest $75,000 fund balance to increase to $673,000 or 7% of spending in fiscal 2007. Notably, the city did not utilize additional short-term borrowing in fiscal 2008, and year-end projections point to an operating surplus, increasing the cushion to $900,000 or almost 10% of spending. The fiscal 2009 budget was adopted with a $243,000 drawdown although city officials project to end with a smaller deficit due to unfilled public safety vacancies. The city's fund balance goal is to maintain reserves equal to 60 days of operating expenditures.


The city's debt profile is characterized by moderate debt levels (aided by substantial state support for local school district debt), slow principal amortization, and modest future capital plans. Located 10 miles southeast of downtown Dallas, the City of Balch Springs measures a modest 9 square miles and is situated at the intersection of Interstate Highways 635 and 20. Its estimated 2008 population of 19,719 represents a negligible increase over its 2000 census. Although Dallas County wealth levels are well above average, the city's wealth levels lag behind, with 1999 census per capita money incomes equal to 74% of state and 64% of national averages. The county's unemployment rate totaled a modest 4.5% in 2007 but rose to 6.2% in Nov. 2008, notably above the state average but just under the national rate.


Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions and plans to revisit the recalibration in the first quarter of 2009.


Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.








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