Fitch Rates San Francisco, California's $45MM GOs 'AA-'; Affirms Outstanding

SAN FRANCISCO--(Business Wire)--
Fitch rates the City and County of San Francisco, CA's $45 million
general obligation (GO) bonds (Clean and Safe Neighborhood Parks
Bonds, 2008) series 2008B 'AA-'. The bonds will sell competitively on
Aug. 14, 2008. Fitch also affirms the 'AA-' rating on San Francisco's
$1.2 billion in outstanding GO bonds. The Rating Outlook is Stable.

In addition, Fitch affirms the following ratings also with a
Stable Rating Outlook:

--$20.6 million in outstanding settlement obligation bonds at
'A+';

--$413. million various lease-secured obligations at 'A+';

--$67.3 million in San Francisco Finance Corporation lease revenue
bonds open-space fund at 'AA-';

--$69.4 million in San Francisco Finance Corporation various
lease-secured obligations at 'A+';

--$6.5 million in San Francisco Parking Authority lease revenue
bonds at 'A+';

--$120.8 million in San Francisco Redevelopment Agency Moscone
Convention Center and lease revenue bonds at 'A+'.

The ratings reflect San Francisco's solid financial position aided
by a well-disciplined rainy day fund, and a diverse and strong local
economy currently performing well despite national weakness, owing
somewhat to a strong tourism draw. The city's debt ratios are moderate
and will remain affordable despite increased future issuance plans.
Fitch also notes that while the city had increased its fund balance
levels for four years through fiscal 2007, it expects to draw on the
fund balance for operations in fiscal 2008 and 2009.

The budget deficit going into fiscal 2009 was the largest in
several years and only about half was closed with ongoing solutions
(either on the expenditure or revenue side). And while the local
economy is still performing well, tax revenue growth is likely to slow
by fiscal 2010 due to the weakening national economy, exacerbating the
existing budget imbalance. The city's ability to maintain prudent
reserve levels will be challenged by structural and political
characteristics which limit financial flexibility through dedication
of general purpose revenue to specific uses, and pressures to retain
certain service levels despite state and federal funding reductions.
Additional uncertainties include the ultimate size of state funding
reductions and a sizable unfunded liability for retiree healthcare.

These near- and long-term financial concerns are balanced by the
city's diverse revenue base, adequate reserve levels going into a
strained period, and its well-funded pension system. About 75% of
general fund resources come from local sources ($2 billion in fiscal
2007), thereby reducing the city's exposure to changes in state
funding ($480 million in fiscal 2007).

San Francisco's economy is performing better than most California
metro areas. Tourism continues to show strength, evidenced by growth
in enplanements and high hotel occupancy rates (79%). In addition, the
city's role as a regional center provides stability. Professional and
business services and financial services together make up almost one
third of the city's jobs, benefitting from venture capital and
relatively little exposure to mortgage-related finance. Nonetheless,
the unemployment rate in the city did increase slightly to 4.5% in
April 2008 from 4.1% in May 2007, indicating some economic slowing.

Through fiscal 2007, the city's financial operations have
benefited from the economic gains, with property, real estate
transfer, payroll, and utility user taxes all rising considerably.
Audited results for fiscal 2007 show a moderate general fund surplus
and the fourth consecutive year of positive operations, reversing two
years of significant operating losses. The year-end unreserved fund
balance rose to $141 million, a strong 5.3% of expenditures and
transfers out. Adding the $133.6 million in the city's rainy day fund
for budget stabilization, the cushion rises to 10.4% of spending. The
rainy day fund is prudently structured to build a financial cushion in
strong economic years and keep high revenue gains from building
unsustainable spending into the budget.

More recent financial data shows strain, with the city's
nine-month budget status report expecting fiscal 2008 revenues
slightly below budget and a sizeable operating loss for the year. The
fiscal year-end 2008 fund balance beyond the rainy day fund is
projected to decline to $82 million (about a $50 million reduction).
Property transfer taxes and state resources are below budget, with
much of the loss offset by higher than budgeted property, business,
and hotel taxes, and lower spending in programs jointly funded with
the state.

The adopted general fund fiscal 2009 budget totals $3.05 billion
and closes a projected $338 million gap. The budget is balanced with
about one half of the gap-closing measures being non-recurring in
nature, such as use of reserves, capital deferrals, and a financing
for projects previously cash funded. Also, the budget includes a
relatively small amount of fee and fine increases and labor
concessions with most unions. The budget retains $98.3 million in the
rainy day economic stabilization fund, after $19.3 million is granted
to the San Francisco Unified School District to help minimize layoffs.

The city's OPEB liability is sizeable, estimated at $2.6 billion
in November 2007. The actuarially determined annual required
contribution would be about $257 million, a significant increase over
the fiscal 2008 expenditure of $115 million, funded on a pay-as-you go
basis. However in order to reduce its OPEB liability, voters approved
a measure in June 2008 which will establish an OPEB trust, and
increase the city's pension cost while reducing its OPEB liability by
doubling the vesting requirement for healthcare benefits for future
employees.

San Francisco's debt burden remains affordable despite sizable
recent issuances. Including overlapping debt, debt per capita totals
$4,440 per capita and 2.7% of taxable market value. Future issuance
plans are rising as the city begins to address needs identified in its
sizable $19.7 billion capital improvement plan which includes $4.8
billion in general fund supported projects. The city will vote on an
$887 million GO measure to rebuild its hospital in November.
Two-thirds voter approval is required.

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings, San Francisco
Karen Ribble, 415-732-5611
Amy S. Doppelt, 415-732-5612
Alan Gibson, 415-732-7577
or
Media Relations:
Cindy Stoller, 212-908-0526, New York

Copyright Business Wire 2008