San Francisco is making plans to sell $136 million of one-year bond anticipation notes next month to finance the first phase of the rebuilding of San Francisco General Hospital.

California’s fourth-largest city would normally sell long-term debt to begin the $887 million construction project, which was approved by voters last month. But officials have been forced to make back-up plans in the face of rising long-term rates and undersubscribed sales by major issuers like the California Department of Water Resources.

While city officials said they’re deciding how to proceed, San Francisco public finance director Nadia Sesay this week asked the Board of Supervisors to change city law to allow the use of Bans.

Sesay — who usually sells the city’s long-term GOs competitively as 20-year, fixed-rate debt — told lawmakers she would take the Bans out with long-term debt in a year, though she sought authority to sell them with maturities as long as five years.

“There seems to be some stabilization in the short-term end of the market,” Sesay said. That would allow the city to sell notes that yield about 1.5% instead of long-term bonds with relatively steep yields of over 5.5%.

Under the current financing plan, San Francisco would sell enough long-term notes to fund a year and a half of construction in January. It would take the notes out with long-term debt in 2010.

It plans to sell the entire $887 million for the massive hospital project over five years. Sesay is working to keep the costs down on the GOs to keep a promise to voters to hold property tax rates steady. The city only plans to issue the hospital debt as old debt is paid down, opening up capacity with existing tax rates.

The bonds were approved with support from 84% of San Francisco voters last month. The city’s GOs are rated Aa2 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-minus by Fitch Ratings.

The city plans to sell the hospital bonds in late January and will “regroup” to decide whether to go with Bans or long-term debt after the holiday, Sesay said. It is being advised by Robert Kuo Consulting LLC of San Francisco and KNN Public Finance of Oakland.

Sesay said she expects to the market to be able to absorb the long-term bonds because they’re well rated GOs, but she’s worried enough to plan for the worst.

“We are making sure we have alternatives,” she said. “We’ve never experienced anything like this, even after Sept. 11, 2001.”

San Francisco last brought GOs to market in August, selling $40 million of park bonds maturing over 20 years with a true interest cost of 4.1%.

The city is also planning to sell $36 million of library lease revenue bonds next month. Sesay said the city is also exploring back-up plans for that deal, including creating a commercial paper program.


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