SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following City and County of San Francisco, California (the city) refunding certificates of participation (COPs):
--$26 million, series 2013-R1;
--$32.9 million, series 2013-R2;
--$17.4 million, series 2013-R3;
--$159.7 million, series 2013-R4.
The COPs are expected to be sold competitively the week of Sept. 9. Proceeds will be used to refund outstanding COPs for interest savings.
In addition, Fitch affirms $1.8 billion in outstanding city general obligation (GO) bonds at 'AA' and about $1 billion in various city, Finance Corporation and San Francisco Redevelopment Agency lease obligations at 'AA-'. A full list of ratings for lease obligations follows at the end of this press release.
The Rating Outlook is Stable.
The COPs are secured by the city's covenant to budget and appropriate lease rental payments for use of various essential governmental facilities. Additional security for the series 2013-R1, 2013-R3, and 2013-R4 COPs is provided by a cash-funded debt service reserve.
The GO bonds are secured by an unlimited ad valorem tax pledge on all taxable property in the city without limit as to rate or amount.
KEY RATING DRIVERS
FINANCIAL MANAGEMENT IMPROVES FLEXIBILITY: The 'AA' rating on the city's GO bonds reflects solid improvements to the city's budgeting, planning and reserve policies that Fitch believes will limit what has historically been a high level of volatility in year-to-year financial performance. Furthermore, the city continues to make meaningful progress containing its post-retirement benefit liabilities.
EXCEPTIONALLY STRONG ECONOMIC BASE: San Francisco's large and dynamic economy has seen continued strong labor force and employment growth rates. Taxable assessed valuation (TAV) growth remains robust. Wealth indicators are very strong and the tax and employment bases are very diverse.
SOUND FINANCIAL POSITION: The city rebuilt its available fund balance (unrestricted fund balance plus rainy day reserve) to solid levels after drawing down its reserves rapidly during the recession. New policies are structured to slow the use of reserves during a downturn.
STRONG FINANCIAL MANAGEMENT AND OVERSIGHT: The city's charter requires periodic budget monitoring and gives the independent controller strong expenditure control.
MIXED DEBT PROFILE: The city's outstanding debt is high on a per capita basis, but Fitch considers it affordable given the city's wealth levels and strong tax base. Capital needs are large, but above-average amortization should keep the city's direct debt levels affordable.
MODERATE BUT RISING CARRYING COSTS: Carrying costs including debt service, pension and other post-employment benefit (OPEB) costs were in the moderate range at about 19% of governmental less capital spending in fiscal 2012. However, this is likely to rise over the near term.
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and fundamentally strong economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
STRONG FINANCIAL OVERSIGHT SUPPORTS STRONG CREDIT
The city's charter requires the budget be based on revenue projections of the independent controller. The charter also requires periodic budget status reports and permits the controller to freeze appropriations if actual revenues are less than budgeted. In 2009, voters approved a charter amendment instructing the controller to establish various budgeting, projecting and budget stabilization policies.
Since that time, the board has adopted policies including two-year budgeting, a biennial five-year forecast with balancing strategies, use of one-time revenues for one-time expenditures, and budgetary reserve funding policies and procedures. The budget stabilization account is funded from two of the city's most volatile revenue sources, including real property transfer tax revenues in excess of the five-year average.
The new reserve policies in particular have contributed to the city's improved financial position. Rainy day and stabilization reserves have increased materially since their low point in fiscal 2010; furthermore, funding the reserves should curb the city's historical reliance on unsustainable revenue growth. Based on preliminary results for fiscal 2013, the city appears likely to deposit $27 million of surplus real property transfer tax revenue to its budget stabilization reserve, raising its balance to $102 million (about 3% of fiscal 2012 spending).
DIVERSE REVENUES; GROWING FUND BALANCES
As both a city and county, San Francisco enjoys a relatively diverse revenue base which performed adequately during the national recession and has showed solid growth in fiscal years 2012 and 2013. Local taxes generated about 71% of general fund revenues in fiscal 2012, resulting in somewhat less exposure to state and federal funding (combined at 21.5% of fiscal 2012 revenue) than other California counties. Expenditures likewise reflect its dual role, with salary and benefits comprising only about 50% of general fund spending.
The city's diverse revenues are led by property (34% of fiscal 2012 general fund revenues), business (14%), hotel (6%) and sales (4%) taxes. Business, sales and hotel taxes returned to growth in fiscal 2011 after recessionary declines. Fiscal 2011 operations yielded a net operating surplus ($136.2 million, or 4.6% of spending) after three years of large draws on fund balance. The fiscal 2012 surplus of $127.7 million brought the unrestricted general fund balance to a strong $402 million, or 12.8% of expenditures and transfers out. Including the rainy day reserve which is a component of restricted fund balance, available fund balance was a strong 13.9% of spending.
These fund balance levels compare favorably to a pre-recession peak available fund balance of 10.9% of spending in fiscal 2006. As noted, the city expects to contribute another $27 million to its budget stabilization account in fiscal 2013.
BUDGET CHALLENGES REMAIN
The city closed a projected $123.6 million general fund gap for fiscal 2014, equal to 4% of 2012 spending, with $100 million in revenue improvements and a variety of expenditure reductions. Management's five-year forecast, which was prepared prior to adoption of the fiscal 2014 budget, projects general fund deficits rising to about $487 million in fiscal 2018 (15% of fiscal 2012 spending), largely due to more rapid growth for personnel expenses than revenues. Solutions to close the gap include slowing capital spending, departmental efficiencies, and lower actual labor costs among other options. Fitch believes the city has sufficient expenditure flexibility to address the forecast deficits, though wage pressure could present a challenge.
ECONOMIC GROWTH OUTPACES STATE AND NATION
TAV remained positive throughout the downturn; TAV increased at a strong rate into fiscal 2011 (up 5.1%) but was essentially unchanged for fiscal 2012 (up 0.5%). TAV increased a further 4% in fiscal 2013 and based on the certified roll from July 2013, fiscal 2014 TAV is up an additional 4.6%. The unemployment rate improved in the 12 months ending May 2013 to 5.2% from 7.3%, as employment increased a strong 4%, compared to 3.2% for the state and 1.2% for the nation over the same period.
PENSION AND OPEB COSTS RISING BUT AFFORDABLE
The city is currently funding its OPEB costs on a pay-as-you-go basis, about $83 million in fiscal 2012, or 2% of non-capital governmental spending. Funding at the actuarially required level ($219 million, or 5.6% of non-capital governmental spending) would be challenging. A proposed ballot measure would formalize pre-funding of the city's OPEB liability and will be considered by voters in November 2013. Fitch would view progress on this as a credit positive.
The city's retirement fund is adequately funded at about 82% using Fitch's 7% return assumption. Pension costs are expected to rise as additional investment losses are smoothed in over the next two years. Concern about rising costs is offset somewhat by the recent pension reforms that require employees to share responsibility for the rising costs.
Carrying costs, including pension, OPEB and debt service, consumed about 19% of fiscal 2012 governmental spending less capital, a level Fitch believes is manageable. However, as noted, pension and OPEB annual costs are likely to rise somewhat over the medium term.
AFFORDABLE DEBT AND LARGE CAPITAL NEEDS
San Francisco's debt burden remains affordable despite sizeable recent issuances. Including overlapping entities, debt totals a high $6,688 per capita but a moderate 3.1% of taxable market value. Future debt issuance plans are expected as the city addresses needs identified in its 10-year $4.9 billion general fund capital improvement plan
In addition, Fitch affirms the following COPs issued by the city at 'AA-':
--$35.6 million, series 2013A (Moscone Center Improvements);
--$29 million, series 2001A and 2001B (30 Van Ness Ave. Project);
--$34.8 million, series 2003 (juvenile hall replacement project);
--$18.7 million, refunding series 2004-R1 (San Francisco courthouse project);
--$142.6 million, series 2007A (city office buildings - multiple properties);
--$148.5 million, series 2009A (multiple capital improvement projects);
--$35.2 million, series 2009B (multiple capital improvement projects);
--$164.9 million, series 2009C and 2009D (525 golden gate avenue);
--$127.7 million, refunding series 2010A;
--$41.9 million, series 2012A (multiple capital improvement projects);
--$86.2 million, refunding series 2011A and 2011B (Moscone Center South refunding project).
Fitch affirms the following lease revenue bonds issued by the City and County of San Francisco Finance Corporation at 'AA-':
--$35.2 million, series 2008A, 2010A, 2011A, 2012A and 2013A (equipment lease program);
--$17.1 million, series 2010-R1 (911 information and emergency communications system);
--$30.9 million, series 2009A (branch library improvement project);
--$120.8 million, series 2008-1 and 2008-2 (Moscone Center expansion).
Fitch affirms $55.5 million of corporation lease revenue bonds, series 2006 and 2007 (open-space fund) at 'AA'.
Fitch affirms $4.3 million of San Francisco redevelopment agency lease revenue bonds, series 1992 (George R. Moscone convention center) at 'AA-'.
Corporation lease revenue bonds (open-space fund) are secured by lease payments made from a voter-approved property tax set-aside for open space. Additional security is provided by 12 months rental interruption insurance and a cash-funded debt service reserve fund.
City and corporation outstanding lease obligations are secured by the city's covenant to budget and appropriate lease payments for use and occupancy of city assets that Fitch believes provides strong incentive to appropriate. Additional security is provided by standard insurance provisions.
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.
Applicable Criteria and Related Research:
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria