Fitch Rates San Francisco, CA's $209MM GOs 'AA'; Outlook Stable

Fitch Ratings assigns an 'AA' rating to the following City and County of San Francisco, California (the city) general obligation (GO) bonds:

--Approximately $209 million series 2013D.

The bonds are expected to be sold competitively the week of Jan. 6. Proceeds will be used to support the rebuilding of San Francisco General Hospital.

In addition, Fitch affirms $1.8 billion in outstanding city GO bonds at 'AA' and approximately $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.

SECURITY

The GO bonds are secured by an ad valorem 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 ongoing 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 are moderate but likely to rise.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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 budget 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. In fiscal 2013 the city added $39 million to its rainy day and budget stabilization reserves, raising the balance to $148 million (about 4.3% of general fund 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 shown solid growth over the last several years. Taxes generated more than two-thirds of general fund revenues in fiscal 2013, resulting in somewhat less exposure to state and federal funding than other California counties. Total tax revenues for fiscal 2013 were 5% above prior year levels and 23% above receipts for 2010.

General fund balances have improved steadily over the past three years, with unrestricted fund balance reaching a healthy 14.3% of spending at the end of fiscal 2013. General fund cash balances have also strengthened, rising to $721 million in 2013, a three-fold increase from 2010 levels. Continued revenue growth in excess of budgeted amounts appears likely to support further gains in fund balance and cash levels for fiscal 2014.

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 (14% of fiscal 2013 spending), largely due to more rapid growth for personnel expenses than revenues. Solutions to close the gap include slowing capital spending and departmental efficiencies, 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 levels rose by 4.5% in fiscal 2014 and maintained a 3.2% compounded annual growth rate over the past five years. Employment growth has been similarly robust and the city's unemployment rate fell to 5.3% in October 2013, well below state and national averages. Wealth and income levels are high.

PENSION AND OPEB COSTS RISING BUT AFFORDABLE

The city is currently funding its OPEB costs on a pay-as-you-go basis, about $160 million in fiscal 2013, or 3.7% of governmental expenditures. Funding at the actuarially required level ($418 million or 9.6% of governmental expenditures) would be challenging. Fitch considers voters' approval of a 2013 ballot measure to prevent future raids on a recently established OPEB trust as a credit positive.

The city's retirement fund is adequately funded at about 78% 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 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 20% of fiscal 2013 governmental expenditures, 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 $6,522 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 $4.7 billion general fund capital improvement plan, which could raise debt burden above current levels, depending on the timing of issuances and repayment schedules.

In addition, Fitch affirms the following COPs issued by the city at 'AA-':

--$4.8 million series 2013B (port facilities, non-AMT);

--$32.9 million series 2013C (port facilities, AMT);

--$26 million refunding series 2013-R1;

--$32.9 million refunding series 2013-R2;

--$17.4 million refunding series 2013-R3;

--$159.7 million refunding series 2013-R4.

--$28.8 million series 2013A (Moscone Center Improvements);

--$27.9 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);

--$139.9 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);

--$152 million series 2009C and 2009D (525 golden gate avenue);

--$122.1 million refunding series 2010A;

--$41.9 million series 2012A (multiple capital improvement projects);

--$80.6 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-':

--$29.6 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-'.

SECURITY

City and corporation COPs and lease revenue bonds are secured by the city's covenant to budget and appropriate lease payments for use and occupancy of city assets that Fitch believes provide a strong incentive to appropriate. Additional security is provided by standard insurance provisions.

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.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813277

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Fitch Ratings, Inc.
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Stephen Walsh, [phone]
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San Francisco, CA 94118
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Karen Ribble, [phone]
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