High leverage brings negative outlook to San Diego sewer bonds

The San Diego Public Facilities Financing Authority received a mixed bag from the rating agencies ahead of plans to issue debt to support its Pure Water project, which would produce one-third of the city's drinking water locally by 2035.

Fitch revised the outlook on the sewer bonds to negative from stable, citing a significant jump in leverage, which is expected to remain above eight times through fiscal yearend 2030, after it rose to 8.2 times in fiscal 2025. Fitch revised the outlook on the system's water bonds to negative in July.

Despite the negative outlook, Fitch assigned a AA rating to sewer revenue bonds, which the authority plans to issue on the city's behalf via negotiated sale on or around May 5. Fitch also affirmed the AA ratings on the city sewer system's outstanding obligations and assessed the system's standalone credit profile at AA.

S&P Global Ratings assigned its AA long-term rating to the authority's anticipated $467 million series 2026A and $28.5 million series 2026B subordinate sewer revenue bonds, issued on behalf of San Diego's wastewater system.

S&P also affirmed its AA-plus long-term rating on the authority's senior sewer revenue refunding bonds and its AA long-term rating on the authority's subordinate sewer revenue bonds issued for the wastewater system. S&P's outlook is stable.

Shannon Groff, lead analyst on Fitch's report released Tuesday, wrote that leverage is expected to "remain elevated for the foreseeable future" due to "ongoing capital spending for system maintenance and potential Phase 2 costs for the Pure Water project," which is the city's effort to produce its own water.

The system's leverage increased from 3.7 times in fiscal 2022 to 8.2 times in fiscal 2025, driven by generally declining funds available for debt service and an increase in long-term debt from about $920 million to $1.4 billion.

Fitch said its AA rating is supported by strong underlying characteristics: the city is a monopolistic retail provider with legal authority to adjust rates without external oversight; its favorable service area with stronger income levels compared to the nation; and the monthly residential sewer bill is considered affordable for 88% of the population.

The sewer system provides retail wastewater services to approximately 1.4 million people within the city and wholesale service to about 900,000 people across 12 participating agencies. Planned capital spending for fiscal years 2026 to 2030 totals $1.78 billion, including $1.5 billion in additional debt. The majority of the capital expenditure is concentrated in spending on pipelines, large pump stations, trunk sewers and treatment plants.

The preliminary offering documents are set to post either Thursday or Friday for the subordinate sewer revenue bonds, said Jyothi Pantulu, San Diego assistant director of debt management. The retail order period is planned for May 5, with institutional pricing planned for May 6.

"The city remains committed to a disciplined financial strategy as we address our long-term infrastructure needs," Pantulu said in an email. "While we acknowledge Fitch's revised outlook, the city continues to rigorously evaluate its sewer capital program to ensure an appropriate balance between regulatory compliance and affordability."

The change in leverage is primarily associated with the city's investment in its critical infrastructure, including Pump Stations 1 and 2 and the Point Loma Wastewater Facility, she said.

"We believe the AA rating for this credit continues to reflect the strong underlying credit quality of the city's sewer utility and its ability to meet all financial obligations," Pantulu said. "The city will continue to engage transparently with rating agencies and stakeholders as we demonstrate our long-term fiscal stability."