SAN FRANCISCO -San Francisco needs to cut as much as $350 million of general fund spending to balance its budget next year in the face of a slowing economy, lower state aid and rising health care costs.

The city's budget shortfall helped convince Fitch Ratings to revise its outlook on the city's general obligation bonds to stable from positive last week. Fitch rates the city's $1.2 billion of GO debt AA-minus. The city plans to bring $452 million of debt to market in the next two months.

"The city is facing some additional financial stress," Fitch analyst Amy Doppelt said. "The rainy day fund looks like it will be invaded."

Doppelt said the city may spend as much as a quarter of its $134 million rainy day fund to avoid layoffs at the San Francisco Unified School District amid a decline in state education aid. She said the city also has limited financial flexibility in downturns because voter initiatives have set minimum spending levels for purposes such as public transportation and children's services.

Still, Doppelt said Fitch believes the city remains in "good shape" financially, citing a "diverse and strong" local economy and "moderate" debt levels. Standard & Poor'sand Moody's Investors Servicerate the bonds AA and Aa3 respectively.

Mayor Gavin Newsom last week ordered departments to make budget cuts for the second time this year. Newsom told managers to cut their budget requests for the fiscal year that begins July 1 by at least 8%, which is likely to force layoffs and spur contentious budget negotiations with the Board of Supervisors.

The city is dealing with a sharp decline in home sales that has reduced its real-estate transfer tax revenues by 14% in the current fiscal year. It also expects to face reductions in state aid next year because the state of California is working to close a $16 billion budget gap of its own. At the same time, the state's fourth-largest city continues to face rising health care expenses for both its public hospital and for retirees.

"We're still a good credit," said Nadia Sesay, director of the Mayor's Office of Public Finance. "The mayor is required to introduce a balanced budget, so we're accustomed to making tough decisions. We'll balance it somehow."

Sesay said the city plans to sell $12 million of equipment lease revenue bonds and $31 million of library general obligation bonds in April. In May, it plans to issue $250 million of general obligation refunding bonds and $159 million of certificates of participation to finance construction of a new headquarters for the Public Utility Commission.

That's in addition to about $400 million of refunding debt the city-owned airport will bring to market over the next three months.

The city also plans to ask voters to approve $800 million of general obligation bonds in November to finance reconstruction of San Francisco General Hospital.

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