The outlook on the city and county of San Francisco, California, was revised by Moody's Investors Service to negative from stable as a result of heightened exposure to coronavirus pressures.
Moody's affirmed its Aaa rating on $2.6 billion in general obligation bonds, and its Aa1 and Aa2 ratings on $1.5 billion in lease-backed bonds.
The revised outlook “reflects the likelihood that the pandemic's impact on San Francisco's economy and financial position will be unusually severe, due in part to its revenue mix, which is more exposed to risks than most cities,” Moody’s analysts wrote in the report. “The city is highly exposed to relatively volatile revenue from tourism and business travel and has exposure to volatility in property taxes.”
The GO bonds are secured by a voter-approved unlimited ad valorem property tax pledge of all taxable property within the city boundaries.
The lease revenue bond Series 2008-1 and 2008-2, refunding COPs Series 2011A and certificates of participation Series 2017B, rated Aa1, are secured by rental payments under standard abatement lease agreements for certain portions of the Moscone Convention Center, assets Moody's said it considers less essential, which are paid with a demonstrated, stable non-pledged revenue source.
The remaining Aa1-rated obligations are secured by rental payments under standard abatement lease agreements for assets that Moody's said it views as more essential or for equipment with a strong lease structure where the lease term matches the useful life of the leased assets. The Aa2-rated obligations are secured by rental payments under standard abatement lease agreements for assets that we view as less essential.
Newly developed commercial and multi-family residential properties, which are more at risk to downward reassessment, comprise a substantial portion of recent, and rapid growth in San Francisco’s tax base, Moody’s wrote. The city also has steeply graduated property transfer taxes, which will be affected by a slowdown in commercial real estate transactions, analysts wrote.
“The combined effects of these exposures could materially weaken the city's fiscal health absent politically difficult, offsetting expenditure adjustments,” Moody’s wrote. “The timeframe necessary for such adjustments, however, may be extended given the exceptional strength of the city's balance sheet going into this coronavirus recession.”
Moody’s cited the city’s large and diverse tax base, and an unusually strong socioeconomic profile for the Aaa rating. That profile has improved in tandem with the economy and tax base over the last decade, analysts wrote.
Prior to the outbreak, the city’s financial profile had reached its strongest level in the past decade, Moody's wrote.
