San Francisco loses second triple-A rating

San Francisco’s continuing weakened economic trends and deficit spending have resulted in a one-notch downgrade to AA-plus from AAA of its long-term rating and a negative outlook from S&P Global Ratings.

S&P also downgraded on Wednesday the rating on the joint city and county general obligation bonds to AA-plus from AAA and lowered the rating on the city’s appropriations obligations debt to AA from AA-plus.

The downgrade comes ahead of the city’s plans to issue more than $500 million of bonds in 2025.

S&P first assigned a negative outlook to the underlying general obligation rating in April, joining Moody’s Ratings, which had assigned a negative outlook in July 2023.

Moody’s downgraded the city to Aa1 from Aaa and revised the outlook to negative saying the pandemic caused a tech exodus from the city, leading to a weakened economy, reduced commercial real estate, and high office vacancy rates.

S&P Global Ratings credit analyst Li Yang said the city’s continuing economic struggles have led to revenue deterioration, a significant budget gap for the current fiscal year and expectations of heightened budget gaps in coming years, which could lead to a meaningful draw on reserves, all of which contributed to the downgrade.

The city has $2.2 billion of outstanding GO bonds and $1.6 billion of outstanding lease-backed obligations, according to Moody’s October report.

S&P assigned the AA-plus rating to the city’s plans to sell GO bonds in 2025 with anticipated par amounts: $15.15 million GO bonds (Embarcadero Seawall Earthquake Safety), series 2025A-1; $105.57 million taxable GO bonds (Embarcadero Seawall Earthquake Safety), series 2025A-2; $193.81 million GO bonds (Earthquake Safety and Emergency Response), series 2025B-1; $24.90 million taxable GO bonds (Earthquake Safety and Emergency Response), series 2025B-2; $67.43 million taxable GO bonds (social bonds–affordable housing), series 2025C; and $147.87 million taxable GO bonds (social bonds-affordable housing), series 2025D.

The lowered rating reflects S&P’s “expectation that the city will struggle to close a $875.9 million (6% of two-year general fund revenues) two-year budget gap that continues to widen,” analysts wrote.

The stagnant recovery of the city’s downtown core, which in turn has weakened property and business tax growth also were cited by S&P in the downgrade. Analysts noted that the reduced presence or closure of several larger commercial and retail businesses are challenging the city’s fiscal situation.

“City management will have to take meaningful action to curb sharply rising general fund expenditures, including rising salaries and benefits, and growing departmental costs that outpace the projected growth in revenue during the five-year period,” according to S&P. “We believe financial decision-making has become more challenging as the city confronts increasingly difficult fiscal tradeoffs and heightened economic and federal policy uncertainty that could have material impact on its budget.”

S&P also affirmed an AA-plus/A-1 joint support rating on the city’s existing series 2008-1 and 2008-2 variable-rate lease revenue obligations; and an A-1-plus short-term rating on the city’s series 2&2-T and series 3&3-T lease revenue commercial paper (CP) certificates.

S&P rates the appropriation debt one notch below its view of the city’s general creditworthiness to reflect its view of the appropriation risk inherent to the lease structure, S&P wrote.

Fitch upgraded the city’s rating to AAA earlier this year when it revised its state and local government criteria, and assigns a stable outlook.