Rating Action: Moody’s assigns Aaa to San Francisco, CA’s 2021B GOs, affirms outstanding Aaa GO ratings and Aa1 and Aa2 lease-backed ratings; outlook remains negativeGlobal Credit Research – 04 Feb 2021New York, February 04, 2021 — Moody’s Investors Service has assigned Aaa ratings to the City & County of San Francisco, CA’s $66.9 million Tax-Exempt General Obligation Bonds (Earthquake Safety and Emergency Response, 2020) Series 2021B-1 and $14.7 million Taxable General Obligation Bonds (Earthquake Safety and Emergency Response, 2020) Series 2021B-2. Concurrently, Moody’s has affirmed the Aaa ratings on the city’s outstanding general obligation (GO) bonds and the Aa1 and Aa2 ratings on the city’s various outstanding lease revenue bonds (LRBs) and certificates of participation (COPs).The city’s $254.6 million Taxable General Obligation Bonds (Social Bonds – Affordable Housing, 2019), Series 2020C, to which Moody’s assigned Aaa ratings on October 6, 2020, was delayed and the bonds are being renamed Taxable General Obligation Bonds (Social Bonds – Affordable Housing, 2019) Series 2021A.Post-issuance, the city’s outstanding debt will include $2.8 billion Aaa-rated GO bonds, $1.5 billion LRBs and COPs rated either Aa1 or Aa2, and $235 million sales tax bonds not rated by Moody’s. The outlook remains negative.RATINGS RATIONALEThe Aaa rating reflects the city’s large and diverse tax base and unusually strong socioeconomic profile, which improved in tandem with the economy and tax base over the last decade. The rating also reflects the city’s very strong financial profile reached after multiple years of large surpluses prior to the coronavirus outbreak. Despite increased spending in response to the prolonged public health emergency, the city achieved operating balance in its general fund in fiscal 2020 by cutting expenditures to offset revenue declines. However, the city is budgeting a large draw on reserves in fiscal 2021 and forecasting large deficits over the next five years. We believe, however, that the city will make the required cuts to reestablish balance starting in fiscal 2022, based on a track record of conservative forecasting and budgeting that have provided a margin for outperformance. The rating incorporates the city’s charter provisions governing budgetary reserves, retirement benefit and funding, which are critical financial management tools. It further incorporates the city’s moderate fixed cost burden. The rating accounts for the city’s net direct debt that is typical of a California city, though positively an above-average portion is GO bonds, which have a legally separate tax levy for the exclusive purpose of GO debt service. The city’s lease obligations are largely funded from general revenues.The Aa1 rating on the city’s convention center obligations reflects a one-notch difference from the GO rating, narrowed from the usual two notches for an abatement lease of an asset typically considered less essential. This uplift reflects Moody’s view that the convention center has relatively high essentiality, given its contribution to the city’s tourist economy and the importance of that sector to the city’s overall financial health. We do not expect a material change in the city’s view of the convention center’s importance to its fiscal health. The Aa1 rating also reflects revenue dedicated though not pledged for payment of debt service on the LRBs and COPs that was providing nearly two times coverage prior to the coronavirus outbreak. The city anticipates offsetting a shortfall in dedicated revenue with a stabilization reserve created for that purpose and a very small use of convention center operating revenue.The Aa2 rating on the Cal HFA Revenue Bonds 2020 Issue N reflects a two-notch distinction from the GO rating. A standard one-notch is applied to an obligation under an abatement lease for a more essential asset, in this case an affordable housing project. An additional notch has been applied to account for the absence of creditor recourse to the leased asset, the city’s inability to substitute an alternative asset during an abatement situation, the risks associated with reliance on the performance of a third party for use and occupancy of the asset, the lack of a debt service reserve fund and the risks associated with seismic conditions given only one year of business interruption insurance.The Aa1 ratings for lease-backed obligations reflect the standard one-notch distinction from the GO rating, which we apply to obligations secured by payments under abatement leases for more essential assets and for equipment where the term matches the useful life of the leased assets.The Aa2 ratings for lease-backed obligations reflect the standard two-notch distinction from the GO rating, which we apply to obligations secured by payments under abatement leases for less essential assets.RATING OUTLOOKThe negative outlook reflects the forecasted material declines and slow recovery for the city’s largest tax revenue streams due to effects of the coronavirus outbreak and the potential for contraction of the city’s tax base. The city’s tax base growth in recent years resulted from significant new commercial and multi-family residential development, which heightens the risk posed by declining property values since those recently developed properties would be most likely to receive downward reassessments in a prolonged downturn. While the city is currently projecting revenue declines through fiscal 2023 and total revenue recovering to pre-pandemic levels in fiscal 2024, various revenue streams will recover at different rates and to different levels, given that significant uncertainty remains regarding the rate of recovery in business activity due to increased telecommuting, reduced tourism and conventions, potential business relocations, declining rents and an increase in valuation appeals. The specific challenge posed by the pandemic to convention center operations and hotel assessment revenues are reflected in the negative outlook we have for the city’s long-term ratings generally. While the city is better positioned than most to meet the challenges of declining revenue and increased expenditures resulting from this public health emergency, recent forecasts of revenue declines extend beyond prior estimates, with longer term risks to the city’s economy remaining. As a county, San Francisco has higher than average exposure to expenditure cutting pressures, as it will be likely subject to state reductions in health and welfare funding. The negative outlook could be revised to stable if the city is able to mitigate its revenue declines to maintain its financial position, or if revenue declines are less severe than anticipated.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- N/AFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Deterioration of the city’s financial position to a materially weaker level- Prolonged weakening of the city’s economy- Material increase in debt, pension or OPEB liabilities- Downgrade of the city’s GO rating would result in a downgrade in lease-backed obligations- For obligations secured by convention center assets, protracted loss of transient occupancy tax and Moscone Expansion District assessment revenues, which are being used to fund debt service, could result in widened notching- For the bonds secured by lease payments on the 833 Bryant Apartments, an abatement situation due to failure of the partnership or city to perform under their agreements to meet affordability requirements could result in widened rating notching for the bondsLEGAL SECURITYThe GO bonds are secured by a voter-approved, unlimited ad valorem property tax pledge of all taxable property within the city boundaries. For the 2020F GO bonds, the authorizing proposition provided that all loan repayments received for the bond-funded programs authorized by the proposition will be used to offset GO bond costs, including debt service, which reduces the burden on taxpayers.The outstanding LRBs Series 2008-1 (LOC) and 2008-2 (LOC), 2011A COPs and 2017A COPs are secured by lease payments made by the city under abatement leases so long as the city has use and occupancy of the respective leased portions of the Moscone Convention Center.The Cal HFA Revenue Bonds 2020 Issue N issued on behalf of the city are secured by lease payments made by the city under an abatement lease so long as the city has use and occupancy of an affordable housing project at 833 Bryant Street.The remaining LRBs and COPs are secured by lease payments made by the city under abatement leases so long as the city has use and occupancy of the respective leased assets.USE OF PROCEEDSProceeds of the 2021A GO bonds will be used to finance the creation and preservation of affordable housing; repair of public housing developments; down payment assistance for middle-income homebuyers and construction of affordable housing for San Francisco Unified School District (Aa2 negative) and San Francisco Community College District (Aa3 negative) employees, as authorized by voters approving Proposition A in 2019.Proceeds of the 2021B GO bonds will be used for the purposes outlined in the city’s Proposition B approved by the voters in 2020, including projects that will improve fire, earthquake, and emergency response by improving, constructing, and/or replacing deteriorating cisterns, pipes, and tunnels, and related facilities to ensure firefighters a reliable water supply for fires and disasters; neighborhood fire and police stations and supporting facilities; the City’s 911 Call Center; and other disaster response and public safety facilities.PROFILEThe City & County of San Francisco is the economic, employment and cultural center of the San Francisco Bay Area and northern California (Aa2 stable). The city encompasses over 93 square miles, of which 49 square miles are land, with the balance consisting of tidelands and a portion of the San Francisco Bay. Silicon Valley is about a 40-minute drive to the south, and the Napa/Sonoma wine country is about an hour drive to the north. The city has approximately 890,000 residents.San Francisco’s combined city-county organization is unique in California. The City is governed by a board of supervisors, elected from eleven districts, and a mayor who serves as chief executive officer, elected citywide. The City has over 32,000 employees and operates the San Francisco Airport Commission (A1 stable), San Francisco Public Utilities Commission, CA Water Enterprise (Aa2 stable), Hetch Hetchy Water and Power, San Francisco Municipal Transportation Agency (Aa2 negative), San Francisco General Hospital, San Francisco Public Utilities Commission, CA Wastewater Enterprise (Aa2 stable), San Francisco Port Commission (Aa3 negative), Laguna Honda Hospital and CleanPowerSF (A2 stable).METHODOLOGYThe principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260094. The principal methodology used in the lease ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260202. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. 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