OREANDA-NEWS. Fitch Ratings assigns an 'AA-' rating to the following City and County of San Francisco, California (the city) certificates of participation (COPs):

--Approximately \\$125 million refunding COPs series 2015-R1 (City Office Buildings - Multiple Properties Project).

Proceeds will be used to refinance outstanding COPs and are expected to be sold via competitive sale on or about Oct. 7.

The Rating Outlook is Positive.

SECURITY
The series 2015-R1 refunding COPs are payable from lease payments made by the city for use and occupancy of a city office building.

KEY RATING DRIVERS

STRONG RESERVES/FINANCIAL POLICIES SUPPORT POSITIVE OUTLOOK: The Positive Outlook reflects the city's fiscally prudent institutionalized financial policies which, along with strong economic and revenue growth, have resulted in solid rainy day and budgetary reserves. It further reflects Fitch's expectation for continued improvement in the city's financial flexibility as measured by its fund balances and ability to adjust expenditures.

EXCEPTIONALLY STRONG ECONOMIC BASE: San Francisco's large and dynamic economy has seen continued strong labor force and employment growth rates. Taxable assessed valuation (TAV) growth remains robust. Wealth indicators are very strong and the tax and employment bases are very diverse.

SOUND FINANCIAL OPERATIONS: Five years of operating surpluses have resulted from strong economic and revenue growth, moderate expenditure growth and policies to fund reserves with one-time and above-average revenues. Reserves now well exceed pre-recession levels, and new policies are structured to slow their use during the next downturn.

STRONG FINANCIAL MANAGEMENT, OVERSIGHT: The city's charter requires thorough periodic budget monitoring and gives the independent controller strong expenditure control and responsibility for forecasting revenues.

MIXED LONG-TERM LIABILITY PROFILE: The city's overall debt is high on a per capita basis, but Fitch considers it affordable given the city's wealthy tax base. Capital needs are large, but above-average amortization and tax base growth should keep the city's debt levels affordable. Carrying costs including debt service, pension and other post-employment benefit (OPEB) costs are moderate but rising despite recent reforms.

RATING SENSITIVITIES

SUSTAINED POSITIVE OPERATIONS: Continued adherence to adopted fiscal policies to build and maintain reserves and curb expenditure growth resulting in greater assurance of sustained sound financial flexibility would lead to an upgrade.

CREDIT PROFILE

STRONG OVERSIGHT SUPPORTS ENHANCED FINANCIAL FLEXIBILITY

The city's charter features several conservative requirements that promote financial stability. The budget must be based on revenue projections published by the independent controller. The charter also requires periodic budget status reports and permits the controller to freeze appropriations if actual revenues are less than budgeted.

A 2009 voter-approved charter amendment led to the adoption of various financial policies including: two-year budgeting, a biennial five-year forecast with balancing strategies, use of one-time revenues for one-time expenditures, and budgetary reserve funding policies and procedures. Importantly, one of the budgetary reserves, the budget stabilization account, is funded from two of the city's most volatile revenue sources, including real property transfer tax revenues in excess of the five-year average.

The new reserve policies in particular have contributed to the city's improved financial position, helping to rein in expenditure growth during a period of economic expansion. Rainy day and budget stabilization reserves have increased materially since their low point in fiscal 2010; furthermore, the requirement to fund reserves from above-average growth in certain cyclical revenues helps curb the city's historical reliance on unsustainable revenue growth for ongoing expenditures. Although most of the city's new mechanisms remain untested by a severe fiscal shock, in Fitch's view they position the city to better absorb any future economic and revenue uncertainty.

In fiscal 2014, the city added another \\$67 million to its rainy day and budget stabilization reserves, raising the balance to \\$215.5 million (about 5.9% of general fund spending). Estimates for fiscal 2015 point to an additional \\$67 million deposited to these funds and the fiscal 2016 budget includes an additional \\$37.5 million. These levels are in contrast to the \\$39 million balance at fiscal year-end 2010. Furthermore, voters recently amended the charter to limit the amount of the rainy day reserve available for the separately-managed local school district under the original rainy day fund approved in 2003.

HOSPITAL OPERATIONS REMAIN HEALTHY

San Francisco's public hospital (SFGH) has maintained sound financial operations since implementation of the Affordable Care Act. To date, increased revenue from newly insured patients has exceeded the reductions in state and federal support and the city's general fund transfers to the hospital remain at historical levels. Nonetheless, continued reductions in state and federal support for indigent care as well as competition for insured patients will be a challenge going forward. Uncertainties remain in the rapidly changing healthcare environment. Based on its performance to date, Fitch believes the city's hospital is well positioned to address these challenges and that its general fund financial exposure is manageable.

DIVERSE REVENUES; GROWING FUND BALANCES

As both a city and county, San Francisco enjoys a relatively diverse revenue base which performed adequately during the national recession and has shown solid growth over the last several years. Locally generated taxes generate more than two-thirds of general fund revenues, resulting in somewhat less exposure to potential state and federal funding shifts than other California counties. Total tax revenues for fiscal 2014 were 13% above prior year levels and 39% above receipts for fiscal 2010. Fiscal 2015 estimates show an estimated 9% increase in tax revenues over the prior year, led by real property transfer tax (16% growth) and hotel tax (16% growth).

General fund balances have improved steadily over the past four years culminating in a \\$295 million net operating surplus in fiscal 2014 resulting in an unrestricted fund balance of \\$728 million, equal to a solid 19.8% of spending. General fund cash balances have also strengthened, rising to over \\$1 billion in fiscal 2014, a four-fold increase from 2010 levels.

LONG-TERM BUDGET CHALLENGES

The two-year fiscal 2016-2017 budgets represent about 5% growth over the fiscal 2015 budget. The growth is driven by re-opening SFGH, fully funding capital pursuant to the 10-year capital plan, transportation service increases and public safety hiring. The budgets are structurally balanced and continue to fund the city's economic stabilization reserves according to their required formulas.

Despite this sound position, management's most recent update to its five-year forecast (dated May 1,2015) projects general fund deficits rising to about \\$417.9 million in fiscal 2020 (11% of fiscal 2014 spending), largely due to assumptions about more rapid growth for personnel expenses than revenues. Suggested solutions to close the projected gap include slowing capital spending and department savings, among other options. Fitch believes the city has sufficient expenditure flexibility to address the forecast deficits, though wage pressure could present a challenge. Notably, the five-year forecast includes a recession scenario, allowing the city to begin discussing actions which would be needed to address larger deficits.

ECONOMIC GROWTH OUTPACES STATE AND NATION

TAV levels rose by 5.4% in fiscal 2015 and maintained a 4.3% compounded annual growth rate over the past six years. Employment growth has been similarly robust and the city's unemployment rate fell to a very low 3.4% in June 2015, well below state and national averages. Job growth continues to exceed state and national averages and wealth and income levels are high.

PENSION AND OPEB COSTS RISING BUT AFFORDABLE

The city continues to pre-fund a portion of its OPEB costs, aided by charter-required employee contributions, but does not expect to reach the full actuarially-required contribution (ARC) for several years. The pay-as-you-go amount was about \\$166 million in fiscal 2014, or 3.6% of governmental expenditures, and funding at the actuarially required level (\\$341 million or 7.5% of governmental expenditures) would be challenging. Further supporting OPEB funding is voters' approval of a 2013 ballot measure to prevent future raids on a recently established OPEB trust.

The city's retirement plan is adequately funded, estimated at 81% as of June 30, 2014 using Fitch's 7% return assumption. Pension contributions are expected to flatten as investment losses have been fully smoothed in. In addition, concerns about pension contribution trends are offset somewhat by the recent reforms that require employees to share responsibility for the rising costs and limit COLAs.

Carrying costs, including pension, OPEB and debt service, consumed about 22.6% of fiscal 2014 governmental expenditures, a level Fitch believes is high but manageable. However, as noted, OPEB annual costs are likely to rise somewhat over the medium term which could pressure operations.

AFFORDABLE DEBT AND LARGE CAPITAL NEEDS

San Francisco's debt burden remains affordable despite sizeable recent issuances. Including overlapping entities, debt totals a high \\$6,200 per capita but a moderate 2.8% of taxable market value. Future debt issuance plans are expected as the city addresses needs identified in its 10-year, \\$4.7 billion general fund capital improvement plan. Future borrowing could raise debt burden above current levels, depending on the timing of issuances and repayment schedules.