San Francisco had its outlook revised to negative by Moody’s Investors Service, with analysts pointing to the financial and economic headwinds facing the city.
The city maintained a stable financial performance throughout the pandemic, but now anticipates reserve draws from fiscal 2023 through 2025, Moody’s analysts said. It also projects out-year deficits through 2028, although the city regularly identifies future budget gaps as part of the forecasting process.
“The deficits largely reflect the underlying sluggish performance of the city’s economic recovery, particularly its downtown,” Moody’s analysts wrote.
“Prolonged weakness in the city’s commercial real estate market, affected by a slow return of workers to the office, and low downtown utilization continue to weigh on the broad economic vitality of San Francisco’s core business, retail, and tourism districts,” Moody’s analysts wrote.
San Francisco’s 2022-23 budget and next year’s 2023-24 budget total approximately $14 billion each.
The San Francisco controller’s office released a budget update on March 31, addressed to Mayor London Breed and the San Francisco Board of Supervisors, reporting the “shortfall for the coming fiscal year (FY 2023-24) is forecast to grow to $290.9 million.”
The report also forecasts a $779.8 million total deficit for the upcoming two fiscal years, and a $1.3 billion deficit by FY 2027-28.
“Factors accounting for the growing deficits include an increase in city personnel costs (salaries and benefits); companies going remote or leaving the city altogether, resulting in hardship for San Francisco’s economy and lower tax revenues; and undisciplined spending on programs to address San Francisco’s increasingly severe homelessness crisis,” according to a report published by the California Policy Center.
Moody’s affirmed the Aaa issuer ratings on the city’s $2.6 billion in outstanding general obligation bonds and the Aa1 and Aa2 ratings on the city’s $1.4 billion in lease-backed obligations. The city also has $19.5 billion in additional debt outstanding across its governmental and enterprise activities, which were unaffected by the outlook revision.
The triple-A issuer rating “incorporates the city’s currently robust financial profile, strong management practices, and diverse revenue sources supported by a favorable property tax structure,” according to Moody’s.
Those credit qualities combined with the city’s exceptionally large tax base and its status as a premier technology and innovation ecosystem could give the city the “time and resources to adapt,” Moody’s analysts wrote.
Moody’s countered by saying the tepid post-pandemic economic progress informs a sluggish forecast for core revenue performance outpaced by expenditure growth in the coming years.
The city holds AA-plus and AAA ratings from Fitch Ratings and S&P Global Ratings, respectively. Both assign stable outlooks.
Fitch’s AA-plus rating “reflects the city’s strong fiscal management capabilities along with substantial resources, which allow for ample time to make necessary adjustments to what appears to be a structural change to the city’s revenue base,” analysts wrote in a March rating report.
The city’s strong fiscal management capabilities and policies, along with significant identified spending flexibility and ample resources, sufficient to mitigate the potential risks over the medium term as the city adjusts to reduced revenues and potentially slower revenue growth was cited by Fitch for its stable outlook.