San Francisco ratings take third hit; Fitch assigns negative outlook

San Francisco received its third ratings hit ahead of plans to issue $552.5 million of general obligation bonds Jan. 9 in a competitive sale.

Fitch Ratings revised its outlook on the city to negative from stable on Thursday, citing its financial woes, but affirmed the city’s AAA issuer default rating and assigned a AAA rating to the planned GOs.

The outlook revision “reflects the persistently large budgetary gaps, which the city is largely closing through the use of various non-recurring resources, including pandemic aid, fund balance and other one-time sources,” Fitch analysts wrote. “Stability of the AAA rating is predicated on the city making demonstrable progress in closing the budget gap.”

S&P announced days earlier it had downgraded the rating on the joint city and county general obligation bonds to AA-plus from AAA and lowered the rating on the city’s appropriation obligations debt to AA from AA-plus. S&P maintained a negative outlook first assigned in April.

Moody’s downgraded the rating to Aa1 from Aaa in October and affirmed its negative outlook set in July, saying the pandemic caused a tech exodus from the city, leading to a weakened economy, reduced commercial real estate values and high vacancy rates.

The city has $2.2 billion in outstanding GOs rated by Fitch, $49 million outstanding finance corporation lease revenue bonds, $16.1 million outstanding finance corporation lease revenue bonds, $1.5 billion in outstanding certificates of participation, and $562.8 million Transbay Transit District Community Facilities District special tax bonds.

The overall strength of the city’s demographic and economic level indicators (unemployment rate, educational attainment and median household income) were cited by Fitch for the city retaining its AAA rating.

“The city benefits from exceptional income and wealth indicators; per capita personal income is over two and a half times the national average and assessed value per capita for fiscal 2024 is about $426,000,” Fitch wrote.

The city’s post-pandemic recovery has been “tepid,” Fitch analysts wrote. “According to the city’s Office of Economic Analysis, the average weekly in-office attendance is less than half pre-pandemic levels, among the lowest in the country. BART, the inter-country transit system, shows ridership at just one-third pre-pandemic levels, and the citywide MUNI bus and light rail system less than 60% of pre-pandemic levels.”

“Many of the city’s industries, particularly the technology sector, have allowed varying levels of work from home practices, and several firms have announced layoffs, all of which have reduced economic activity in the city’s commercial areas,” Fitch wrote.

The city’s unemployment rate was 3.6% in November, compared to the state’s unemployment rate of 5.3% and 4% for the nation, according to the state Employment Development Department. The percent of the population with a bachelor’s degree or higher is 59.8%, putting it in the 95^th percentile nationally and the median household income in 2024 is $146,872, according to the U.S. Census.

The proceeds of the GO bonds being sold competitively will be used to help finance the Embarcadero Seawall, earthquake safety and emergency response, and affordable housing projects pursuant to their respective voter approved bond measures, according to Fitch.

The bonds will be sold in the following tranches: $15.1 million GO bonds (Embarcadero Seawall earthquake safety, 2018), series 2025A-1; $104.9 million taxable GO bonds (Embarcadero Seawall earthquake safety, 2018), series 2025A-2; $193.9 million GO bonds (earthquake safety and emergency response, 2020), series 2025B-1; $24 million taxable GO bonds (earthquake safety and emergency response, 2020), series 2025B-2; $67.2 million taxable GO bonds (social bonds — affordable housing, 2019), series 2025C; $147.3 million taxable GO bonds (social bonds — affordable housing, 2024), series 2025D.