San Francisco struggles to regain ground post-pandemic

Bonds

The jury is still out on San Francisco’s fiscal health, though the tech layoffs didn’t appear to be the death knell that was predicted.

The city’s outlook was revised to negative by Moody’s Investors Service in July with analysts citing outyear deficits projected through 2028 and expectations it would draw on reserves in fiscal 2023 and across budget years 2024 and 2025. Moody’s added the city regularly identifies future budget gaps as part of its forecasting process.

“Despite these various headwinds, the city continues to benefit from strong GDP growth, a very large tax base, and very high resident wealth and income profiles for a city its size,” Moody’s analysts Joseph Manoleas, Alexandrea J. Cimmiyotti and Eric Hoffmann wrote.

Mayor London Breed said — during a July 26 signing ceremony for the $14.6 billion budget for fiscal years 2023-2024 — she worked with supervisors to close a $780 million deficit.

“Our agreement with the Board of Supervisors delivers a budget that builds on the core priorities that San Francisco residents deserve, while closing a significant budget deficit,” Breed said during the event. The budget will deliver critical public safety support to the city’s neighborhoods, drive economic recovery and help revitalize downtown, she said.

San Francisco Mayor London Breed said she worked with county supervisors to close a budget deficit.

Bloomberg News

San Francisco’s tech industry reversed several months of job losses in late 2022 and early 2023 and was the city’s leader in job growth this summer, according to the most recent monthly report from the City & County of San Francisco’s Controller’s Office of Economic Analysis.

The information and professional services sector added 6,000 jobs and year-over-year job growth in tech is now off 0.1%, the report said.

Vacancies in downtown office buildings have experienced little recovery, rising again in the second quarter, while rents, office attendance, and downtown transit ridership were all largely flat, according to Jones Lang LaSalle, a global commercial real estate company.

The San Francisco Bay area, with its famed Silicon Valley, is considered a significant economic driver for the state.

With office vacancies spiking, and tourism and the return of office workers to seats in office buildings lagging other major cities, city leaders don’t have a moment to spare with intervention efforts.

Crime has been much featured in talk of the city’s so-called Doom Loop, but that largely consists of a rise in property theft and an increase in fentanyl-related deaths, according to the police data.

California Gov. Gavin Newsom has taken aim at the rise in theft in the state’s major cities. He approved $267 million to be sent to 55 cities and counties across the state to hire more police, make more arrests, and secure felony charges against suspects.

“Enough with these brazen smash-and-grabs. With an unprecedented $267 million investment, Californians will soon see more takedowns, more police, more arrests, and more felony prosecutions,” Newsom said during a Sept. 11 press conference. “When shameless criminals walk out of stores with stolen goods, they’ll walk straight into jail cells.”

Breed also promised to increase the city’s police force by 200 more officers during her budget address.

The city ranks last among 32 U.S. cities in the University of Chicago’s Center for Municipal Finance index that tracks secondary market prices for general obligation bond debt, although its Director Justin Marlowe said that Memphis had been vying with the city for last place the first two weeks of September.

“We apply a ‘repeat sales’ methodology to secondary market prices,” Marlowe said. “It’s similar to the Case-Shiller Index for house prices.”

The center’s researchers look at all secondary market trades of an issuer’s general obligation bonds over a rolling three-week period, Marlowe said.

The repeat sales method fills in any gaps where bonds of particular maturities don’t trade, he said, then they roll the secondary market prices and yields into a single index value for each issuer.

San Francisco’s value of 43.66 was the lowest among the 32 cities tracked as of Sept. 15, compared to Milwaukee’s index value (close to the average for all cities) of 75.09. Memphis came in at 49.44.

Tucson tops the scales at 116.5, Wichita is No. 2 at 113.5, followed by Chicago at No. 3 with 105.8, as of Sept. 15.

“Memphis is still next to last, but with much more distance between it and San Francisco, compared to the past two weeks,” Marlowe said.

Borrowers on debt for Memphis’ famed Graceland Mansion have missed several debt payments, according to a July 12 Bond Buyer article. The article notes the city’s tourism industry has been slow to recover post-pandemic, a situation shared with San Francisco.

“Occupancy and rates have remained steady for most of the year and hotel revenues are still only 73% of pre-pandemic levels,” according to the July 5 report from the controller’s report.

It’s not just San Francisco facing challenges, California’s unemployment rate in August was unchanged at 4.6%, the third highest in the U.S., below only Nevada at 5.4% and the District of Columbia at 5.0%, according to the August 2023 jobs report from the California Center for Jobs & the Economy.

The California Center for Jobs & The Economy also reported seven companies have relocated their headquarters, back-office functions or expanded out of state, rather than in the Golden State.

Anaplan, Hero Digital, Lynx Automation and Thermomix moved their headquarters out of state. Google opened a data center in Texas, Chevron opened an R&D Center in Texas and Yield Engineering Systems opened an advanced technology center in Arizona.

The city holds triple-A ratings from Moody’s and S&P Global Ratings. Fitch Ratings affirmed the city at AA-plus in March ahead of a bond sale. The city holds stable outlooks from both Fitch and S&P.

Moody’s cited changes in employment conditions, tourism patterns and retail behavior, which have the city drawing on reserves through at least 2025 for the negative outlook.

Moody’s explained the city holds its highest rating, because it still has an “exceptionally robust financial profile, strong management practices, and diverse revenue streams supported by a favorable property tax structure.”

“The city’s credit quality is bolstered by its exceptionally large tax base and its continued status as a premier technology and innovation ecosystem, even in the new work-from-home climate,” Moody’s analysts wrote in the July 6 ratings analysis. “The city also has a very strong property wealth and resident income profile, which balances an elevated leverage and fixed-cost profile.”

The city’s general government debt includes $3 billion in GO bonds, $1.4 billion in lease-backed obligations and $208 million in sales tax revenue bonds for transportation projects payable from pledged County Transportation Authority sales tax, the Moody’s report said.

S&P boosted the rating to AAA from AA-plus in 2019. The improved rating reflects “our view of continuity in the city and county’s cautious budgeting approach across changes in political leadership during a prolonged economic expansion,” Credit Analyst Chris Morgan said at the time.

When S&P affirmed its triple-A rating and stable outlook on March 17 ahead of a $236.2 million GO bond sale, analysts said, the rating agency anticipates the city won’t need to draw on reserves to an extent it has a material impact on city finances.

If the city experiences “unmitigated declines in available general fund reserves, then the city’s overall credit profile could be pressured,” S&P added.

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