Fitch Ratings has upgraded the Town of Corte Madera, CA's ratings as follows:

--$9 million certificates of participation (COPs), taxable series 2006, to 'BBB' from 'BB+';

--Issuer Default Rating (IDR) to 'A-' from 'BBB'.

The Rating Outlook is Stable.

SECURITY

The certificates are payable from lease rental payments for several assets: the parcels financed by the COPs (an aging but occupied local strip mall), the town hall, and two fire stations. The town covenants to budget and appropriate for lease payments and provide rental interruption insurance. Debt service reserve requirements are met by a surety bond provided by Ambac.

KEY RATING DRIVERS

The upgrades reflect a combination of positive credit developments and application of Fitch's revised criteria for U. S. state and local governments, which was released on April 18. The 'A-' IDR reflects the town's strong economic and revenue growth prospects, solid spending flexibility, and moderate long-term liability burden. These strengths are offset by the town's limited revenue framework and on-going financial pressure imposed by the Park Madera (strip mall) enterprise fund. The town plans to address deferred capital needs with proceeds from an April 2014 temporary voter-approved sales tax increase (expiring in 2020).

The rating on the COPs, two notches below the town's IDR, reflects both the appropriation requirement for debt service and the additional risk feature associated with the parcels financed (an aging but occupied local strip mall).

Economic Resource Base

The town is well integrated into the San Francisco Bay Area regional economy and benefits from its close proximity and good access to the large and diverse economic base. The town is largely residential but also serves as a regional retail center that attracts shoppers from the affluent surrounding area, including San Francisco. Tax base growth accelerated in fiscals 2015 and 2016 with more than 7% increases each year in taxable assessed value. Additional gains are expected over the near term due to the improvement in the real estate market and some additional residential development within the town. Wealth levels are very high and unemployment low.

Revenue Framework: 'a' factor assessment

Revenue growth has historically been in line with or above the level of U. S. economic performance and Fitch expects that trend to continue. However, the town has limited independent revenue raising ability.

Expenditure Framework: 'aa' factor assessment

Carrying costs are moderate, providing the town with solid flexibility to cut expenditures. Spending growth is likely to be in line with or moderately above revenue growth over time.

Long-Term Liability Burden: 'aa' factor assessment

Debt and pensions are a moderate burden relative to personal income.

Operating Performance: 'bbb' factor assessment

The town's general fund has posted two years of solid financial performance following the passage of the temporary sales tax override. However, its overall financial profile continues to be weighed down by a deficit fund balance and negative operating margins in the Park Madera fund.

RATING SENSITIVITIES

Stable Financial Performance: Maintenance of general fund balance above historical lows even in economic downturns is key to stability at this rating level. Conversely, a reversal of recent performance could lead to negative rating action. The town will need to control spending carefully in light of the expiration of the sales tax override in several years.

CREDIT PROFILE

Revenue Framework

The majority of general fund revenues are generated by sales taxes at 46% including the override and property taxes at 26%. In 2014, voters approved a temporary one-half-cent sales tax expiring in fiscal 2020 which yields approximately $2.5 million per year, or 13% of total general fund revenues.

Growth has historically been in line with or above U. S. economic performance based upon analysis of the 10 years through 2014. Given the solid economic base and prospects for further growth, Fitch expects this trend to continue.

The town has very limited independent revenue-raising capacity largely due to Proposition 13, which allows for a maximum increase of 2% per year in tax assessments other than sales or resales, and Proposition 218, which requires voter approval for tax increases. The town received voter approval in 2014 for a six-year sales tax override.

Expenditure Framework

Public safety accounts for over 50% of general fund spending. The general fund has supported the Park Madera shopping fund for about a decade through interfund loans and partial payment of debt service on the COPs issued by the town to purchase the mall. This support is expected to continue indefinitely, representing a pressure point on general fund spending. Management reports that the temporary one-half-cent sales tax will be used for primarily for deferred maintenance, including deferred equipment, storm drainage, and street repair.

The pace of spending growth is likely to be in line with or modestly above that of revenue growth given ongoing spending demands.

Carrying costs are moderate at 15.7% of governmental spending, due primarily to retiree benefit funding demands; debt service costs are very low. All five labor agreements are in effect through July 1, 2018 and include 2%-3% annual compensation increases. There are no re-openers, no binding arbitration clauses, and strikes are not permitted. All contracts require increasing the portion of the pension contribution paid by employees.

The town continues to face spending pressures from its 2006 purchase of a local strip-mall. The fiscal 2015 audit recorded a $2.9 million accumulated negative fund balance in the Park Madera Fund, an enterprise fund established by the town to account for the mall operations. The town council approved a plan to address the operating deficits by transferring in general fund resources to keep the Park Madera fund's balance at fiscal 2014 levels. Ultimately intended to provide sufficient net revenue to pay annual debt service on the COPs that financed the mall's acquisition, the fund's annual operating deficit (before the general fund subsidy) was $140,412 (16% of the enterprise fund's spending) in fiscal 2015. Fitch expects the general fund transfer to remain relatively stable through at least 2019 as the mall is fully leased with reportedly stable tenants.

Long-Term Liability Burden

The town's aggregate debt and unfunded pension liabilities are moderate at 13% of personal income. Debt totals $81 million, including overlapping debt, although only $10 million was direct debt as of fiscal 2015. The town participates in CalPERS and its pension plans have a combined funding ratio of 74% and net liability of just over $15 million, adjusting for a 7% investment return assumption. Its liability related to retiree healthcare is $9.7 million, or 1.3% of personal income.

The town's long-term debt consists of a lease purchase agreement to finance the town's portion of a new police facility site and the 2006 COPs, which financed the acquisition of the Park Madera Center shopping mall. Amortization of principal on the town's direct debt is slow at 33% in 10 years.

Operating Performance

Fitch's Analytical Sensitivity Tool (FAST) produces a 4.5% decline in general fund revenues in a 1% drop in national GDP stress scenario. However, Fitch notes that this output is materially overstated as it is based on a 15-year general fund history which includes a revenue decline in fiscal 2010 due to an accounting change (transfer of the library to Marin County) rather than economic trends.

Even adjusting for this dynamic, the town has demonstrated a low level of reserves relative to spending through fiscal 2013, particularly when excluding from fund balance the loan to the Park Madera fund, which in Fitch's opinion does not have the capacity to repay the obligation.

The town's reserves began to increase in fiscals 2014 and 2015 due to the imposition of the six-year sales tax override. The town expects to expend the override revenues, above any needed to maintain approximately $2.5 million in reserves, on deferred maintenance. As such, Fitch does not expect continued additions to reserves going forward.

The town's financial performance has begun to turn around in the last two years primarily due to the passage of the sales tax override. Liquidity also increased during this time from essentially zero to approximately three months cash on hand by fiscal year end 2015. The general fund continues to make up the variance between the Park Madera debt service payments and rents collected from the shopping center's tenants. Management reports that general fund reserves have built up in fiscal 2016 as deferred maintenance projects have not yet gotten underway, but will be spent over the next several years.