San Diego Upgraded by Fitch Ratings

LOS ANGELES — San Diego Mayor Kevin Faulconer called Fitch Ratings' one-notch issuer rating boost of the city to AA a testament to its commitment to fiscal discipline.

Fitch Ratings upgraded San Diego's issuer rating from AA-minus Friday, also boosting the city's general fund-backed lease revenue bonds to AA-minus from A-plus. The outlook is stable.

"This credit upgrade is a validation of the city's responsible financial practices and further proof that San Diego's economy is strong and growing," Faulconer said Thursday in a statement.

The upgrade resulted from the application of Fitch's revised criteria for state and local governments released April 8, 2016, particularly with regard to the strength of the city's revenue framework and its anticipated financial resiliency in a stress scenario, Fitch anaysts wrote in the report.

The rating agency also cited the "city's exceptionally strong gap-closing capacity and satisfactory reserves."

The city will need that gap-closing capacity with an estimated $47 million shortfall in the city's operating budget for the coming year as pension costs are expected to rise faster during the next fiscal year than projected tax revenue, according to city officials. The city expects to end fiscal 2017 in balance due to departmental under-expenditures, and to meet that year's reserve policy goal of 14.75%, despite the small deficit in the midyear fiscal 2017 report, Fitch said.

Faulconer will release his budget on April 15.

"The city faces expenditure pressures above revenue growth, which could result in deficit spending through fiscal 2019," Fitch analysts wrote.

The city had $2.2 billion in outstanding long-term debt as of June 30, 2016, according to a fiscal year 2017 budget document. Fitch said the debt is moderate relative to the city's resource base, but the city's debt profile could change if additional debt is issued by San Diego, which is expected to maintain a low debt profile, and/or by San Diego Unified School District, which retains $3 billion in unspent bonding authority.

The city also identified $4.3 billion in capital infrastructure needs in fiscal years 2018-2022, but Fitch said it has only pinpointed $3 billion in projected funding, leaving a $1.3 billion funding gap.

Fitch analysts, however, ticked off a long list of positive attributes including a strong general fund revenue performance, solid expenditure flexibility, healthy economy and tax base, conservative financial management policies, and strong financial planning and disclosure practices.

The upgrade means lower borrowing costs for the city's general fund capital program, so that a larger amount of future bond proceeds can be used to pay for infrastructure, rather than borrowing costs, said Mary Lewis, the city's chief financial officer.