Amended - Fitch Downgrades Balch Springs Bonds to 'BBB+'; Outlook to Negative.

AUSTIN, Texas -- This is an amendment to a release that went out on May 15; it adds an additional security in the first paragraph.)

Fitch Ratings has downgraded the city of Balch Springs, Texas' approximately $4.8 million in outstanding general obligation bonds (GOs), $4.9 million outstanding certificates of obligation (COs), and $335,0000 outstanding public property finance contractual obligations to 'BBB+' from 'A-'. The Rating Outlook is revised to Negative.

The downgrade to 'BBB+' reflects the subsequent structural imbalance that led to the near depletion of general fund reserves. The Negative Outlook reflects the potential for continued financial deterioration and the city's recent political instability, culminating in the recall of the majority of the city council in 2004.

Fitch assigned an initial rating of 'A-' to the city's GOs and COs in 2002 based on accelerating tax base growth, limited future capital needs, and proximity to the large labor market of the Dallas-Ft. Worth metroplex. Cited credit risks included the city's large dependence on economically volatile sales tax receipts, slow principal amortization, moderately high overall debt levels, and below average wealth levels.

The city incurred operating deficits annually in fiscal years 2001-2005 despite strong annual growth in taxable assessed value over that period averaging 12%. As a result, the city's general fund reserves in fiscal 2004 declined to only $107,000 or 1.7% of expenditures and transfers out, down from 13.9% in 2002. Financial pressures continued through fiscal 2005 requiring the city to issue tax anticipation notes to meet its cash flow needs. The city expects to modestly add to its general fund balance in fiscal 2006 and reports year-to-date sales tax returns beating estimates by 2%. Stablization and improvement of the city's finances remains key to maintaining the rating, especially given its dependence on sales taxes for operations.

In 2004, residents successfully petitioned and voted to recall four of the city's seven council members due to general dissatisfaction with the city's operations. Efforts to improve financial position are evident. The council that followed pledged to restore the city's financial stability by building general fund reserves, primarily by raising property taxes and promoting the authorization of new sales taxes. In addition, the council has informally adopted a policy to raise the general fund balance to a level equal to 30 days operating costs. However, credit concerns remain over the lack of a formal financial recovery plan.

Balch Springs, with a 2006 estimated population of 19,600, has experienced only modest growth since 2000. Located in Dallas County, TX, about 10 miles southeast of downtown Dallas, the city's proximity to several interstate highways makes it a desirable area for commercial development. Consequently, several new retailers have opened in Balch Springs over the past few years, thereby driving the city's tax base growth and aiding sales tax collections.

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.