Fitch Ratings has assigned an 'AA-' rating to the following City and County of San Francisco (the city) new debt issuances:
--approximately $183.5 million general obligation (GO) bonds (earthquake safety & emergency response, 2010), series 2012A;
--approximately $73.3 million GO bonds (clean and safe neighborhood parks, 2008), series 2012B;
--approximately $74.2 million GO bonds (road repaving and street safety, 2011), series 2012C.
Proceeds will be used to fund various capital projects as approved by voters. The bonds are expected to sell competitively on Feb. 23.
In addition, Fitch affirms the following ratings:
--$1.3 billion GO bonds at 'AA-';
--$1 billion various city, San Francisco Finance corporation (the corporation), San Francisco Parking Authority and San Francisco Redevelopment Agency lease obligations at 'A+';
--$58.1 million corporation open-space fund lease revenue bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are secured by an unlimited ad valorem tax on all taxable property in the city.
Outstanding lease obligations are secured by the city's covenant to budget and appropriate for use and occupancy of various essential and non-essential city assets subject to abatement. The city covenants maintain rental interruption insurance and liability insurance.
The corporation's lease revenue bonds (open-space fund), series 2006 and 2007, are secured by lease rental payments made from a dedicated property tax set aside by charter for park and recreational services and facilities.
KEY RATING DRIVERS
LARGE, DIVERSE ECONOMY STRENGTHENING: San Francisco benefits from a large and dynamic economy and a tax structure that captures most of the economic activity in the city. Sales, hotel, business and real property transfer taxes have all returned to good growth levels in the first half of fiscal 2012. Property tax receipts remain buffeted by the recession and will continue to lag as values are soft and appeals are worked through the system.
PERSISTENT AND LARGE BUDGET GAPS: Despite the improved outlook on revenues, the city's current budget gap for fiscal 2013 is still large at an estimated $229 million (about 7% of fiscal 2012 appropriations). This disparity stems partly from one-time or temporary solutions to recent budget gaps, leaving a structural imbalance which seems unlikely to be resolved by an economic recovery alone.
STRONG CITY POLICIES AND CONTROLLER OVERSIGHT: A voter-approved measure adopted in November 2009 required the city with guidance from the controller's office to adopt numerous budgetary and reserve policies and procedures. These practices should help to improve the city's operating margin and help it retain adequate reserve levels through economic cycles. Budget monitoring continues to be a strength.
LARGE UNFUNDED RETIREE COSTS: The city's sizeable retiree costs and its large unfunded retiree health benefit liability ($4.4 billion) contribute to budgetary pressure. A recently adopted voter initiative is expected to reduce these costs somewhat and help contain their growth. Nonetheless, the unfunded liability and required annual appropriations related to retiree costs will likely continue to rise as a share of general fund spending.
AFFORDABLE DEBT, SIZEABLE CAPITAL NEEDS: The city's outstanding debt is high on a per capita basis but considered affordable given the city's wealth levels; however, capital needs are large, including a sizeable amount of repair and replacement of aging facilities, roads and other infrastructure. Modestly above-average amortization should keep the city's direct debt levels affordable.
CREDIT PROFILE
DIVERSE REVENUES; STABLE TAX BASE
As both a city and county, San Francisco enjoys a relatively diverse revenue base which performed adequately during the national recession and is showing good improvement in fiscal 2012. Local taxes generated two-thirds of all revenues in fiscal 2011, resulting in somewhat less exposure to state and federal funding (combined at 22% of fiscal 2011 revenue) than other counties. The recession has had a comparatively modest impact on the city's economy.
Business, sales and hotel taxes all returned to growth in fiscal 2011 and have continued to improve through the first half of fiscal 2012. Assuming more moderate growth in the second half of the year, the controller's office forecasts business taxes to be up 4.8% over fiscal 2011 levels, sales taxes up by 7.5%, and hotel taxes by up 11.6%. The unemployment rate also improved in the 12 months ending November 2011 to 7.8% from 9.6%, as employment increased a strong 3.2%.
Taxable assessed valuation (TAV) continued to increase in fiscal 2011 (up 5.1%), and is essentially unchanged for fiscal 2012 (up 0.5%). The continued growth is reportedly due in part to a large backlog of supplemental assessments for commercial properties sold at the height of property values; however, a spike in appeals may offset some of the recent gains. The difference in value between the assessor and taxpayer opinion of open appeals as of Nov. 1, 2011 was a high $42.8 billion (27% of TAV). Appeals granted have historically been well below the requested reduction; however, the large amount of appeals may suppress TAV growth over the medium term.
IMPROVED BUT LARGE BUDGET CHALLENGES; RISING RETIREE COSTS
Despite the relatively modest recessionary impact on revenues, the city continues to face a sizeable fiscal imbalance. Large budget gaps have been solved for several years with temporary or one-time measures, including use of reserves. An operating surplus of $136 million in fiscal 2011 brought the unrestricted/assigned general fund balance to a sound $240 million, or 8.2% of expenditures and transfers out. This gain followed three consecutive years of drawdowns exceeding $100 million, which had reduced the available general fund balance (including the rainy day reserve) to $37.5 million at fiscal year end 2010. This amount represented just 1.2% of expenditures and transfers out, down from $274 million (10.9%) in fiscal 2007.
The city's current estimated budget gap for fiscal 2013 is $229 million. In light of the positive revenue performance, Fitch believes continued labor concessions (such as the current 4% furlough savings) may be more difficult to achieve, pressuring the city's accumulation of reserves. Budget pressure continues from increasing retiree costs, estimated to total an above average 9.6% of fiscal 2011 spending.
AFFORDABLE DEBT OFFSET BY LARGE CAPITAL NEEDS
San Francisco's debt burden remains affordable despite sizeable recent issuances. Including overlapping debt, debt totals a high $6,696 per capita but a moderate 3.2% of taxable market value, reflecting the large amount of commercial property in the city. Future debt issuance plans are expected as the city addresses needs identified in its 10-year $4.9 billion general fund capital improvement plan.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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