S&P lowers San Francisco's credit rating due to deficit spending

A credit rating agency has dropped San Francisco's rating because of the city's deficit spending and economic outlook.

S&P Global Ratings lowered its long-term rating and underlying rating to 'AA+' from 'AAA' on the City and County of San Francisco's existing general obligation debt and lowered its long-term rating and SPUR to 'AA' from 'AA+' on the city's appropriation obligations outstanding.

"The downgrade reflects our view of the city and county's continued weakening economic trends and deficit spending based on audited fiscal 2024 figures and further revenue deterioration compared with previous forecasts that heightens the size of the budget gap in current and subsequent fiscal years, which could lead to a meaningful draw on reserves," S&P Global Ratings credit analyst Li Yang said.

Lower credit ratings for governmental bodies have a similar effect to a lower personal credit rating. Borrowers see loans to them as riskier and will charge a higher interest rate to mitigate the increased risk of not getting that loaned money back. A city with a high credit rating would be able to issue bonds that are purchased with much lower rates.

S&P said its outlook for San Francisco is negative given the city's financial challenges.

The rating "reflects the increasingly challenging revenue environment facing the city and county and our expectation that the city will struggle to close a $875.9 million two-year budget gap that continues to widen," according to the report. "Deteriorating revenue forecasts for the current and next two fiscal years stem from a stagnant economic recovery in the downtown center, which has in turn weakened property and business tax growth."

The report said city officials could have a difficult time keeping expenses in check.

"City management will have to take meaningful action to curb sharply rising general fund expenditures, including rising salaries and benefits, and growing departmental costs that outpace the projected growth in revenue during the five-year period," according to the report. "At the same time, we believe financial decision-making has become more challenging as the city confronts increasingly difficult fiscal tradeoffs and heightened economic and federal policy uncertainty that could have material impact on its budget."

The rating also reflects "a worsening trend in the city's economy, evidenced by the reduced presence or closure of several large commercial and retail businesses in the city."