San Francisco’s Credit Rating is in a Downward Spiral as Office Vacancy Hits 36%
San Francisco has seen a downgrading of their outstanding general obligation and appropriation debt from “stable” to “negative” by S&P Global Ratings.
The decision comes as office vacancy in San Francisco hits a record low during the first quarter of the year, pointing to financial challenges the city has yet to recover from since the end of the pandemic.
S&P Claims San Francisco is Struggling to Repay Debt
S&P’s decisions stem from several factors, including a weakness in the real estate market and lower tourism, which have affected the city’s ability to repay debts.
![An image of the Golden Gate Bridge during a clear afternoon in San Francisco](https://images.savvydime.com/2024/04/09327c2f-img10.jpg)
Source: Wikimedia
The financial services firm’s move came shortly after it was revealed that office vacancies in the city had reached a staggering 36.6%, according to The San Francisco Chronicle.
Budget Problems for the Golden Gate City
According to experts who spoke with The San Francisco Chronicle, Golden Gate City will also experience a $245 million budget deficit by the end of the next fiscal year.
![An image of two financial experts working on budgeting](https://images.savvydime.com/2024/04/da624aa7-img15.jpg)
Source: Freepik
Projections also surmise the city will experience a further $555 million deficit the following year, meaning that the shortfall could equate to over $1 billion by 2027.
S&P Press Release
During an S&P press release, the financial firm spoke about the challenges that lie ahead for San Francisco.
![An image of several reporters standing on the street during a press release](https://images.savvydime.com/2024/04/cfdd7642-img18.jpg)
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They said, “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.”
Habits That Have Been Threatening the Growth of San Francisco
According to a Bloomberg report, crime, work-from-home habits, an increase in the price of real estate, and homelessness have all threatened the city’s growth.
![An image of a homeless camp on a road in San Francisco](https://images.savvydime.com/2024/04/b5d97f37-img23.jpg)
Source: Wikimedia
However, they do admit that the S&P’s change in outlook “doesn’t necessarily mean that the credit rating will be adjusted.”
San Francisco's Reserves Remain Strong
While the negative outlook has financial experts questioning San Francisco’s ability to pay future debts, the city’s reserves remain solid.
![An image of the city of San Francisco during the tail end of the day](https://images.savvydime.com/2024/04/0d7bb28d-img26.jpg)
Source: Wikimedia
However, if the city is forced to drain its reserves, it could drastically affect its credit rating.
S&P suggests Revenue Recovery is Necessary for San Francisco
S&P affirmed the AAA long-term rating it has placed on the city’s impressive general obligation debt.
![An image of two financial experts looking at a graph on a computer screen](https://images.savvydime.com/2024/04/ee3705cd-img29.jpg)
Source: Freepik
However, “materially stronger revenue recovery” is needed to avoid a “substantially weaker credit profile,” S&P said.
San Francisco Mayor Aims to Cut Budgets
At the end of last year, San Francisco Mayor London Breed approved over $75 million worth of budget cuts in an attempt to rein in the government’s spending.
![An image of the current Mayor of San Francisco London Breed](https://images.savvydime.com/2024/04/7ab40da9-img33.jpg)
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At the time, the announcement followed an early directive that proposed “spending reductions of at least 3% from the city’s general fund. San Francisco has an annual budget of about $14.6 billion,” per The San Francisco Chronicle.
San Francisco’s Weak Recovery From Pandemic
Breed’s decision to cut the budget came amid a projection that the budget deficit could exceed $1 billion by the 2027/2028 fiscal year.
![An image of three people standing side by side wearing face masks](https://images.savvydime.com/2024/04/ef326962-img37.jpg)
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San Francisco’s economy largely relies on tax revenue that comes from businesses in its downtown district. Yet, this has had a weak recovery in the wake of the pandemic.
Larger Problems For San Francisco Set to Arise in the Following Year
While Breed and the city leaders managed to close a major deficit in last year’s budget, it heavily relied on one-time money that won’t be available over the next few years.
![An image of several government officials seated at a large wooden desk](https://images.savvydime.com/2024/04/dfbbd0b7-img40.jpg)
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“Much larger cuts will be needed in the months ahead, and that will require more planning and longer discussions we’ll have with you, your staff, and other City stakeholders,” she wrote at the time.
San Francisco's Deficit Shouldn’t Surprise Anyone
Last year, the Board of Supervisors budget chair Connie Chan said San Francisco’s ongoing deficit “should not be a surprise to anyone.”
![An image of several workers pictured seated at a large table](https://images.savvydime.com/2024/04/25ce782e-img44.jpg)
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“The question is not about these cuts, but about on whose backs we are balancing this budget,” Chan continued It “disproportionately impacts our most vulnerable and communities of color” before going on to vow to close the shortfall expected during next year’s budget negotiations by fighting for a city spending plan “that serves all San Franciscans, not just its wealthiest.”
San Francisco’s Credit Could Enter into a Downward Spiral
Suppose the San Francisco mayor and government officials fail to get the city’s spending under control and increase their overall net tax revenue. In that case, it may result in a weakened credit score.
![An image of San Francisco from a distance during a clear afternoon](https://images.savvydime.com/2024/04/5f389924-img48.jpg)
Source: Wikimedia
As things stand, the state is still struggling to recover financially from the pandemic, and the city center vacancies won’t be filling up anytime soon.