Fitch Negative on San Fran

Fitch Ratings cut its outlook on San Francisco’s debt to negative from stable Wednesday, citing sizeable budget deficits and low reserves. The rating on the city’s $1.2 billion of outstanding general obligation bond remains AA-minus. Fitch rates the bulk of the city’s $1.2 billion of appropriation-backed bonds one notch lower, at A-plus.

“The outlook revision to negative from stable reflects San Francisco’s sizable future years’ projected budget gaps and projected low reserves by the end of fiscal 2010,” analysts Karen Ribble, Alan Gibson and Amy Doppelt said in a report. “The reduced financial flexibility results in part from the city’s reliance on one-time solutions to its structural imbalance.”

The outlook change comes as California’s fourth-largest city prepares to sell $350 million of general obligation bonds to finance park renovations and the rebuilding of San Francisco General Hospital. The bonds are scheduled to sell competitively March 9.

Fitch’s main concern is the city’s budget, which is exposed to state funding cuts, declining revenues and local political culture that makes cuts in public services difficult to implement.

The city closed a substantial general fund deficit of $438 million, or 18% of expenditures, this fiscal year with one-time solutions, such as spending reserves, Fitch said. The city’s reserves will be drawn down to just 2% of general fund expenditures by the end of the year.

The failure to implement permanent cuts or to raise new revenues means the deficit is expected to grow to $522 million in fiscal 2011, when general fund discretionary revenue is projected to be $53.7 million, or 2.7%, below fiscal 2009 levels.

“The city’s proposed plan to close this gap again relies again on a large portion of one-time measures and significant labor concessions yet to be negotiated,” the analysts said.

The task is complicated by the fact that California faces a large budget deficit that’s likely to yield cuts to social services that are administered by counties. San Francisco, which is both a city and a county, has historically absorbed state funding cuts to avoid reducing social services, according to Fitch.

City elected officials are currently exploring options for raising revenues that would require voter approval in November, but they have yet to reach a consensus on which measures to put before voters. They agreed this week to put a $412 million public safety bond measure before voters in June. The bonds would pay to upgrade or replace police and fire facilities to withstand earthquakes.

Fitch said San Francisco’s “large and diverse” economy is contracting, but performing better than most of California. While business, hotel and sales taxes have declined significantly since 2009, property tax collections are still slightly positive.

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