San Francisco loses Aaa rating to Moody's downgrade

San Francisco lost a triple-A rating this week after Moody's Ratings downgraded it to Aa1 from Aaa.

The rating agency cited the city's weakened economy, which has narrowed the city's finances reducing its flexibility to address ongoing spending pressures, in a report released Tuesday.

Moody's also downgraded the city's general obligation bonds to Aa1 from Aaa and lease-backed obligations to Aa2 from Aa1 or Aa3 from Aa2, depending on the essentiality of the leased assets and other factors.

The outlook was revised to stable from negative at the lower rating.

The rating agency also assigned an Aa2 rating to the city's $118.2 million Certificates of Participation, Series 2024A (Multiple Capital Projects).

Post-issuance, the city will have $2.2 billion in outstanding GO bonds and $1.6 billion in outstanding lease-backed obligations.

"The sea change in office employment to a hybrid work model and reduction in commuting to the city's office core have led to reduced economic activity, very high vacancy rates, and depressed rents," Moody's analysts wrote.

"These trends have led to a sharp escalation in the number and value of assessment appeals and a decline in commercial real estate values. The growth rate in the city's tax base will consequently slow considerably and may even contract," the rating agency said.

Post-pandemic economic conditions and social factors are the key factors driving the rating action, analysts said.

Despite the pressures cited by analysts, Moody's said the San Francisco's financial profile remains robust and the city has strong fiscal management practices and diverse revenue sources.

"The city's financial profile is also supported by a favorable property tax structure that is not directly tied to market values and can result in property tax growth even when market values turn down," Moody's wrote.

"The rating incorporates our expectation that over the next few years, reserve levels will drop but remain consistent with the Aa1 rating level," Moody's said.

The Moody's rating incorporates the city's very large tax base, with unusually strong resident incomes at 154.3% of US and full value per capita of $412,816 as of fiscal 2025,.

Fitch Ratings and S&P Global Ratings both rate San Francisco AAA. S&P assigns a negative outlook.