S.F. municipal bond rating downgraded by agency
John Coté,Rachel Gordon, Chronicle Staff Writers
San Francisco Chronicle April 12, 2011 04:00 AM
Wednesday, April 13, 2011
This article appeared on page A - 1 of the San Francisco Chronicle
One of three major rating agencies Tuesday downgraded $2.6 billion in San Francisco municipal bonds because of concerns over shrinking reserves and short-term fixes that the city has used to balance its budget in recent years.
Fitch Ratings found that "persistent and large budget gaps have been resolved year to year predominantly with one-time or temporary solutions, leaving a structural imbalance which seems unlikely to be resolved by an economic recovery."
Besides pointing out structural problems in the city budget, the downgrade could make it more expensive for the city to borrow money for major projects, such as rebuilding San Francisco General Hospital, renovating the War Memorial Building, upgrading neighborhood fire stations and constructing a new combined police command center and neighborhood police and fire stations in Mission Bay, officials said.
Combined, those projects will require the city to borrow hundreds of millions of dollars to complete. The new public hospital, for example, has yet to sell half the bonds needed to fund the $887.4 million project,
Reiskin said. Not even a quarter of the bonds to fund the $412 million in public safety upgrades have been sold, he added.
City Controller Ben Rosenfield was a little more optimistic in his analysis.
"Generally speaking, a lower bond rating means higher borrowing costs for government," Rosenfield said, but other factors also matter, including ratings from the other agencies and the number of investors in the market.
The bad news could be tempered by favorable results from Moody's Investors Service and Standard & Poor's, which are expected to announce their ratings within weeks, he said.
Fitch downgraded two different bond issues one grade from AA to AA-, which the agency still lists as "very high credit quality." Two other series of bonds were given an A+ rating, which is lower but still considered "high credit quality."
The downgrade by Fitch comes as the city is grappling with a $306 million budget deficit for fiscal 2011-12, which starts July 1. The picture worsens over the next two years without long-term fixes enacted soon, according to a recently released budget report. The entire city budget is about $6.6 billion.
Officials and others on the city's political left routinely criticized former Mayor Gavin Newsom for balancing the budget with short-term money and increased city fees while refusing to raise taxes in uncertain economic times.
Mayor Ed Lee, who is serving the year remaining in Newsom's mayoral term after he was elected lieutenant governor in November, said during an appearance before the Board of Supervisors on Tuesday that he was willing to consider additional revenue measures, but didn't specify what forms those would take.
The Fitch report did upgrade the city's future outlook from negative to stable, noting that the revenue picture was improving with the economy and voter-approved tax and fee increases.
"Because of our diverse economy, San Francisco is in a better position than most to deal with the uncertainty created by the state's fiscal situation," Lee said after the board meeting.
Already, she said, the city has adopted plans to bolster its reserve accounts, which should build confidence with the ratings agencies.
"Though we have taken steps to improve the city's financial policies, we still have a lot of work to do to balance our budget and ultimately to improve our credit rating," Chu said.
A smile crept over Supervisor Sean Elsbernd's face when asked about San Francisco's new bond rating - not because he welcomed the financial burden on the city but because of the timing: The report provides ammunition in his battle to rein in spiraling pension and health-care costs for city workers.
"It's yet one more piece of evidence that significant benefit reform is critical to the future fiscal health of the city," Elsbernd said.
Board President David Chiu said, "This is another wake-up call, but we're already wide awake to the difficult choices ahead on everything from pension and benefits reform to where we're going to make the needed budget cuts."
Fitch Ratings found that "persistent and large budget gaps have been resolved year to year predominantly with one-time or temporary solutions, leaving a structural imbalance which seems unlikely to be resolved by an economic recovery."
Besides pointing out structural problems in the city budget, the downgrade could make it more expensive for the city to borrow money for major projects, such as rebuilding San Francisco General Hospital, renovating the War Memorial Building, upgrading neighborhood fire stations and constructing a new combined police command center and neighborhood police and fire stations in Mission Bay, officials said.
Hundreds of millions
"It means our cost of borrowing will be higher and we'll be able to do less work for the same amount of money," said Ed Reiskin, the city's public works chief.Combined, those projects will require the city to borrow hundreds of millions of dollars to complete. The new public hospital, for example, has yet to sell half the bonds needed to fund the $887.4 million project,
Reiskin said. Not even a quarter of the bonds to fund the $412 million in public safety upgrades have been sold, he added.
City Controller Ben Rosenfield was a little more optimistic in his analysis.
"Generally speaking, a lower bond rating means higher borrowing costs for government," Rosenfield said, but other factors also matter, including ratings from the other agencies and the number of investors in the market.
The bad news could be tempered by favorable results from Moody's Investors Service and Standard & Poor's, which are expected to announce their ratings within weeks, he said.
Fitch downgraded two different bond issues one grade from AA to AA-, which the agency still lists as "very high credit quality." Two other series of bonds were given an A+ rating, which is lower but still considered "high credit quality."
The downgrade by Fitch comes as the city is grappling with a $306 million budget deficit for fiscal 2011-12, which starts July 1. The picture worsens over the next two years without long-term fixes enacted soon, according to a recently released budget report. The entire city budget is about $6.6 billion.
Newsom criticized
Fitch said the downgrade "reflects the city's use of most of its remaining discretionary reserves amid continued sizeable budget pressures." The agency also pointed to $4.9 billion in unfunded liabilities and rising retiree costs, and the temporary budget fixes.Officials and others on the city's political left routinely criticized former Mayor Gavin Newsom for balancing the budget with short-term money and increased city fees while refusing to raise taxes in uncertain economic times.
Mayor Ed Lee, who is serving the year remaining in Newsom's mayoral term after he was elected lieutenant governor in November, said during an appearance before the Board of Supervisors on Tuesday that he was willing to consider additional revenue measures, but didn't specify what forms those would take.
The Fitch report did upgrade the city's future outlook from negative to stable, noting that the revenue picture was improving with the economy and voter-approved tax and fee increases.
"Because of our diverse economy, San Francisco is in a better position than most to deal with the uncertainty created by the state's fiscal situation," Lee said after the board meeting.
'Another wake-up call'
Supervisor Carmen Chu, a political moderate who chairs the board's budget committee, said the downgrade sends a stark signal that City Hall has to get its fiscal house in order.Already, she said, the city has adopted plans to bolster its reserve accounts, which should build confidence with the ratings agencies.
"Though we have taken steps to improve the city's financial policies, we still have a lot of work to do to balance our budget and ultimately to improve our credit rating," Chu said.
A smile crept over Supervisor Sean Elsbernd's face when asked about San Francisco's new bond rating - not because he welcomed the financial burden on the city but because of the timing: The report provides ammunition in his battle to rein in spiraling pension and health-care costs for city workers.
"It's yet one more piece of evidence that significant benefit reform is critical to the future fiscal health of the city," Elsbernd said.
Board President David Chiu said, "This is another wake-up call, but we're already wide awake to the difficult choices ahead on everything from pension and benefits reform to where we're going to make the needed budget cuts."
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