SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following Glenwood Springs Rural Fire Protection District, Colorado (the district) bonds:

--$0.4 million limited tax general obligation (LTGO) bonds at 'BBB-'.

The Rating Outlook is Negative.

SECURITY

The bonds are secured by pledged revenues from the LTGO mill levy on all taxable property within the district at a rate not to exceed 3.126 mills.

KEY RATING DRIVERS

CONTINUED STRUCTURAL IMBALANCE: The Negative Outlook reflects the expectation that operating deficits are to continue despite a sizable five-year increase in operating levy in November 2013. Property tax revenues are expected to remain insufficient to cover full costs, while the district has little control over either revenues or expenditure.

PROJECTED FUND BALANCE DEPLETION; CITY SUPPORT EXPECTED: General fund balance is projected to be depleted by the end of fiscal 2014 following chronic deficits. The city of Glenwood Springs (the city) is expected to cover the district's operating shortfalls for five years through a revised intergovernmental agreement (IGA) to be finalized by early 2014.

LIMITED ECONOMY: The local economy is limited and assessed values (AV) endured drastic declines over the last few years.

POSITIVE DEBT CONSIDERATIONS: The district has ample capacity to raise the debt service millage and a low long term liability burden.

RATING SENSITIVITIES

WITHDRAWAL OF CITY SUPPORT: A negative rating action is possible if the city withdraws or limits its support, or if Fitch has reasonable doubt regarding the city's willingness and capacity to provide support.

AV RECOVERY: A positive rating action is possible if the district's AV shows sustainable recovery to the level sufficient to cover operating costs and rebuild a moderate level of reserves.

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 which only provides fire protection and ambulance services, and operates under an IGA with the city.

LIMITED OPERATIONS, CONSTRAINED FINANCIAL FLEXIBILITY

The district has limited control over both revenue and expenditure levels. Operating revenues are derived almost entirely from property tax revenues. It has been levying at the maximum allowed rate for operations, therefore total revenues are very sensitive to AV changes. However, a successful 2013 referendum increased the maximum levy by two mills or a large 32% for five years, providing interim relief. Rates are now comparable to those of neighboring districts.

The district is responsible for providing limited but essential fire services which it contracts out to the city. According to the IGA, the city bills a portion of its overall fire service costs to the district based on the district's share of AV and service calls.

STRESSED OPERATIONS

Recent general fund deficits are a result of significant AV declines, service level increases, and general fire protection cost increases. AV fell by a cumulative 31% between fiscal 2011 and 2014, while fire service costs are estimated to have increased by 16% during the same period.

Fiscal 2012 ended with a large operating deficit of 7% of spending, reducing unrestricted general fund balance down to a modest $34,016, or 5.6% of spending. Despite a $46,563 subsidy from the city, fiscal 2013 is projected to end with another deficit of $27,827, further reducing unrestricted fund balance to below $2,500, or less than 1% of spending.

TAX RATE INCREASE, OPERATING DEFICITS TO CONTINUE

In November 2013, a reported 59% of the voters approved a ballot measure raising the operating levy cap from 6.339 mills to 8.339 mills for five years starting in fiscal 2014, adding $129,000 to the district's property tax revenues. This large increase is insufficient to completely offset AV declines and cost increases. Fiscal 2014 revenues are projected to be $85,347 short of the IGA determined expenses, depleting the general fund balance.

CITY SUPPORT

In light of the district's continuing financial stress, the city has orally agreed to keep subsidizing the district's services for the next five fiscal years. In fiscal 2014, the subsidy in the form of lower payments to the city than its costs is estimated to grow to $62,235.

Fitch expects the IGA will be revised to reflect this arrangement, and that the city will honor the agreement accordingly. The subsidy is a relatively small amount compared to the city's budget. Fitch believes the city has sufficient resources to meet this obligation, although Fitch does not rate the city's debt. In addition, the district is effectively run by the city. Fitch believes the city's own safety concerns provide incentive to continue providing fire protection to the nearby rural district.

City management expects AV will fully recover to a sufficient level to make the district self-supporting by the end of the five year agreement. A negative rating action is possible if this appears unlikely or city withdraws its support then.

LIMITED ECONOMY

The district is primarily residential with limited commercial development due to its mountainous topography. Income levels are comparable to the state and the nation, while unemployment rates are slightly more favorable. Housing market recovery seems to have taken shape, which should help AV to rebound in the future.

FAVORABLE LIABILITY BURDEN

Debt ratios are low, and bonds have a final maturity of 2019. Debt service carrying costs are affordable at 13% of spending. There are no plans for additional debt issuance, as capital needs are mostly funded by a separate levy. The district does not have any direct pension or other-post employment benefits liabilities.

The district has a separate levy for debt service, and another one for capital expenditures. Both receive sufficient revenues and have ample rate-raising flexibility. The debt service levy is currently at 1.346 mills, substantially below the cap of 3.126 mills. AV could withstand a further 57% decline while still meeting debt service obligations.

Additional information is available at www.fitchratings.com.

In addition to the sources of information identified in Fitch's 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, National Association of Realtors, and Zillow.

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 Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015U.S. Local Government Tax-Supported Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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