Fitch Rates San Francisco, California's $120MM GOs 'AA-'; Outlook Stable

Business Wire, July 2, 2008

SAN FRANCISCO -- Fitch rates the City and County of San Francisco, CA's $120 million general obligation (GO) refunding bonds (Laguna Honda Hospital) series 2008-R3 'AA-'. The bonds will sell competitively on July 15, 2008. Fitch also affirms the 'AA-' rating on San Francisco's $1.07 billion in outstanding GO bonds. The Rating Outlook is Stable.

In addition, Fitch affirms the following ratings also with a Stable Rating Outlook:

--$20.6 million in outstanding settlement obligation bonds at 'A+';

--$413. million various lease-secured obligations at 'A+';

--$67.3 million in San Francisco Finance Corporation lease revenue bonds open space fund at 'AA-';

--$69.4 million in San Francisco Finance Corporation various lease-secured obligations at 'A+';

--$6.5 million in San Francisco Parking Authority lease revenue bonds at 'A+';

--$120.8 million in San Francisco Redevelopment Agency Moscone Convention Center and lease revenue bonds at 'A+'.

The ratings reflect San Francisco's solid financial position aided by a well-disciplined rainy day fund, and a diverse and strong local economy currently performing well despite national weakness owing somewhat to a strong tourism draw. The city's debt ratios are moderate and will remain affordable despite increased future issuance plans. Fitch also notes the city's spending restraint and conservative budgeting in recent years as well as concern that future budgets will be pressured on both revenue and expenditures. The lease ratings also reflect a strong lease structure for essential assets.

Fitch expects the city to demonstrate greater financial volatility in the near-future, including fluctuation in reserve levels. Fitch views the city's structural and political characteristics as limiting financial flexibility through dedication of general purpose revenue to specific uses, and pressures to retain certain service levels despite state and federal funding reductions. These factors in turn reduce the city's ability to build and retain above-average reserve levels. Also, Fitch notes upcoming financial pressures, including the potential for slower revenue gains, state funding reductions, the city's tendency to replenish social service programs threatened by state cuts, and a sizable unfunded liability for retiree healthcare.

These near- and long-term financial concerns are balanced by the city's diverse revenue base, solid reserve levels going into a strained period, and its well-funded pension system. About 70% of general fund resources come from local sources, thereby reducing the city's exposure to state funding changes.

San Francisco's economy has sound underpinnings as a regional center and strong tourism draw. Recent economic activity demonstrates a continued strong tourism draw, moderate employment gains, relative stability in the real estate sector and good sales tax revenue growth. Assessed value growth slowed to 4.6% in fiscal 2008, but since fiscal 2002 has averaged 6.9% per year. Hotel occupancy remains high (79%), and is approaching its previous peak of 81% in fiscal 2000. Jobs in the five-county San Francisco-Oakland-Fremont metropolitan statistical area increased 5.1% since 2004, following four years of losses in the prior recession. A substantial decline in the labor force, though, has reduced unemployment and has contributed to above-average wage increases.

Through fiscal 2007, the city's financial operations have benefited from the economic gains, with property, real estate transfer, payroll, and utility user taxes all rising considerably. Audited results for fiscal 2007 show a moderate general fund surplus and the fourth consecutive year of positive operations, reversing two years of significant operating losses. The year-end unreserved fund balance rose to $141 million, a strong 5.3% of expenditures and transfers out. Adding the $133.6 million in the city's rainy day fund for budget stabilization, the cushion rises to 10.4% of spending. The rainy day fund is prudently structured to build a financial cushion in strong economic years and keep high revenue gains from building unsustainable spending into the budget.

More recent financial data shows strain, with the city's nine-month budget status report expecting fiscal 2008 revenues slightly below budget and a sizeable operating loss for the year. The fiscal year-end 2008 fund balance beyond the rainy day fund is projected to decline to $41.6 million. Property transfer taxes and state resources are below budget, with much of the loss offset by higher than budgeted property, business, and hotel taxes, and lower spending in programs jointly funded with the state.

The proposed general fund fiscal 2009 budget totals $3.05 billion and closes a projected $305 million gap. The budget is balanced, with about one-half of the gap-closing measures being non-recurring in nature, such as use of reserves, capital deferrals, and financings for items previously cash funded. Also, the budget includes a relatively small amount of fee and fine increases and labor concessions that require additional actions to achieve. The budget includes $98.3 million in the rainy day economic stabilization fund, after $19.3 million is granted to the San Francisco Unified School District to augment the district's per pupil fund to minimize layoffs.