The financial services firm this week downgraded its outlook on the city’s outstanding general obligation and appropriation debt from “stable” to “negative.” The move comes as office vacancy in San Francisco hit a record 36.6% in the first quarter of the year, exasperating the city’s fiscal challenges in the wake of the pandemic.
San Francisco is projected to face a $245 million budget deficit in the coming fiscal year, and a $555 million deficit in the following year. The shortfall could balloon to more than $1 billion by 2027, if expenditures continue to outpace revenue growth.
S&P said in a release that it believes that San Francisco’s “management will be challenged to make the cuts needed to restore it to budgetary balance during the outlook horizon, which could lead to rating pressure if the city’s general fund reserves decline precipitously.”
Bloomberg first reported on the change in outlook on Monday, noting that it does not necessarily equate to change in credit rating, which would increase the city’s borrowing costs in the municipal bond market.
Despite the negative outlook, the city’s reserves remain strong, and S&P affirmed its AAA long-term rating on San Francisco’s outstanding general obligation debt. But corrective action or “materially stronger revenue recovery” is needed to avoid a “substantially weaker credit profile,” S&P said.
A significant shift to remote work over the past four years has been a leading factor in the hollowing out of the city’s downtown — which has also been plagued by quality of life and safety issues since the start of the pandemic — stunting property and business tax revenue growth.