Fitch Rates San Fran Fin Corp., Calif's $27MM Lse Bnds (Open Space Fund) 'AA-'; Outlook Positive.

SAN FRANCISCO -- Fitch rates the City and County of San Francisco Finance Corporation's $27 million lease revenue bonds, series 2006 (open space fund -- various park projects) 'AA-'. The bonds are expected to sell competitively on October 19, 2006. Co-financial advisors are The PFM Group and TKG and Associates. The Rating Outlook for the bonds is Positive.

The open space fund bonds are secured by lease payments made by the City and County of San Francisco (the city) to the city's Finance Corporation (the corporation) for certain park properties. Unlike the city's other lease obligations, lease payments on the open space fund bonds will be made from a property tax set aside dedicated by charter to park and recreational services and facilities.

The 'AA-' rating reflects the strong debt service coverage provided by net open space fund revenues as well as the city's diverse and recovering economy, strengthened financial position and operations, and affordable debt levels. The Positive Rating Outlook indicates that Fitch could raise the city's tax-supported ratings within the next one to two years. A future upgrade will be dependent on the city's financial and economic performances, particularly on the ability to contain spending within revenue receipts and enable further reserve accumulation. While payment of debt service is subject to appropriation, Fitch believes the ample debt service coverage and voter-dedicated use of the fund provides stronger security relative to the city's other lease obligations.

The open space fund (the fund) was approved by the voters in 1974 and extended in 1988. In 2000, voters approved another extension of the open space fund set aside through 2031 which also authorized the issuance of bonds secured by open space fund revenues. The set aside of $0.025 per $100 of assessed valuation generated revenues of $28.0 million in fiscal 2006. After certain mandatory set-asides are made, net revenues available for debt service and other park expenditures equaled $21.9 million in fiscal 2006. Annual debt service on the bonds is $2.0 million, providing historic coverage of 11.0 times (x). The additional bonds test is good at 1.25x debt service; however, because the set aside expires in 2031 and excess revenues provide considerable operational support to the recreation and park department, the fund is unlikely to be leveraged to this level.

San Francisco's economy has sound underpinnings as a regional center and strong tourism draw. However, recovery is proceeding at a mixed pace. Real estate and tourism show strong gains, with assessed value rising 7.5% per year on average from fiscal 2001 through 2007 and hotel occupancy (74% in 2005) at its highest level since 2000. In contrast, jobs in the area have only shown growth beginning in 2005, with a small 0.9% gain. A substantial decline in the labor force, though, has reduced unemployment and is contributing to above-average wage increases.

The city's financial operations have benefited from the economic gains, with property, real estate transfer, payroll, and utility user taxes all rising considerably. Audited results for fiscal 2005 show a general fund surplus for the second consecutive year, reversing two years of operating losses. The year-end unreserved fund balance rose to $134.2 million, a strong 5.9% of expenditures and transfers in. While this level has risen considerably, it remains below the fiscal 2001 peak. While Fitch expects the city's financial controls and economic improvement to allow reserves to grow, a return to the previous high is not expected. The year-end reserves include a voter-approved rainy day fund that is prudently structured to build a financial cushion in strong economic years while keeping high revenue gains from building unsustainable spending into the budget.

San Francisco's debt burden remains affordable despite sizable recent issuances for a hospital replacement. Including overlapping debt, debt per capita totals $3,763 per capita and 2.7% of taxable market value. Future issuance plans are moderate. However, the city's first capital improvement program was recently approved by the Board of Supervisors, and recognizes significant needs.

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