San Francisco Boom Belied by Year’s Biggest Losses: Muni Credit
San Francisco has added 300 technology companies since 2010, helping it earn its highest credit grade in more than a decade. The fiscal gains haven’t been enough to keep investors from penalizing the city amid the worst losses this year in municipal bonds.
California’s fourth-biggest city, home to Twitter Inc. and Yelp (YELP) Inc., sold about $233 million of general obligations last week, including some to finance earthquake preparedness. With interest rates on local debt setting a 15-month high, the extra yield investors demanded on some bonds rose more than 50 percent from a similar offer last year, data compiled by Bloomberg show.
The increased borrowing costs belie an improving local economy that is making the city of about 826,000 stand out as California’s finances recover. San Francisco’s jobless rate is the lowest since 2008 and home prices exceed 2006 highs. Moody’s Investors Service raised the city’s rating to Aa1 in February, the second-highest level and its best since at least 2000.
“It’s a solid credit,” said Michael E. Johnson, managing partner at Solana Beach, California-based Gurtin Fixed Income Management LLC, which handles $4 billion of munis, including San Francisco debt. He cited an improving financial performance and a housing-market recovery.
As a strengthening U.S. economy fuels bets the Federal Reserve will reduce its bond buying, the $3.7 trillion municipal market has lost 1.5 percent in June, on pace for its biggest drop since December, Bank of America Merrill Lynch data show. Individuals, who own about 70 percent of munis directly or through funds, withdrew $1.6 billion from muni funds last week, the most this year.
The Fed speculation and investors shifting money to stocks contributed to increase interest rates, Nadia Sesay, director of San Francisco’s public-finance office, said in a telephone interview.
San Francisco’s sale included 10-year tax-exempt debt that was priced to yield 2.75 percent, or about 0.4 percentage point over benchmark securities, data compiled by Bloomberg show. In February 2012, the city sold similar obligations at a 2.13 percent yield, for a spread of 0.22 percentage point.
“While the interest rates were slightly higher than they were at the last sale of the city’s general-obligation bonds, the rates nonetheless represent a very advantageous borrowing environment for the city,” Sesay said.
The sale results contrasted with the city’s strengthening fiscal picture.
San Francisco was home to 1,846 tech companies in the third quarter of 2012, up from 1,517 in the fourth quarter of 2010, according to state data analyzed by brokerage CBRE Group Inc. (CBG) in San Francisco.
Among them is Twitter, a microblogging site valued at almost $10 billion by one of its investors last month. After the company told the city in 2011 that it was considering space outside San Francisco, officials offered to exempt it from a payroll tax. The company wound up moving to the Central Market neighborhood in 2012.
Zynga Inc. (ZNGA), the biggest maker of online social games; Salesforce.com Inc. (CRM), the largest maker of customer-management software; and Yelp, a website where customers rate businesses, are also based in San Francisco.
San Francisco County’s unemployment rate was 5.4 percent in April, not seasonally adjusted, the lowest since June 2008, and the state’s third-lowest after San Mateo and Marin counties, according to data from the state’s Employment Development Department.
Prices on non-distressed properties, including those that aren’t sold in foreclosure, reached a median of $857,500 in May, higher than at the height of the housing bubble in 2006, according to RealtyTrac Inc., an Irvine, California-based data provider. San Francisco’s median household income was about $73,000 from 2007 to 2011, above the state average of $61,632, U.S. Census data show.
The city is projecting $368 million in tax-revenue growth in fiscal 2014, which begins July 1, over this year.
The goal of Mayor Ed Lee, a 61-year-old Democrat, of bringing more technology jobs to the city carries the risk of reliance on volatile industries.
Zynga’s shares have fallen 48 percent in the last 12 months as players shift from titles on Facebook Inc., the game maker’s core business, to applications on mobile devices. The company said this month it will cut 520 jobs, or 18 percent of its staff, amid disappointing results from titles outside the “FarmVille” series.
Lee meets regularly with technology-business leaders from 500 firms who advise him on ways to better deliver online services, he said yesterday at the Bloomberg Link Next Big Thing Summit in Half Moon Bay, California. Every tech employee creates four additional jobs, he said.
Still, San Francisco isn’t overly reliant on the tech industry, with biotech companies and arts and culture also creating jobs, Lee said.
In last week’s sale, the city borrowed to spruce up parks and roads and also bolster infrastructure in the event of a major earthquake.
There’s a 63 percent chance that one or more quakes of at least magnitude 6.7 will strike the Bay Area before 2038, the bond prospectus said, citing a 2008 report by the Working Group on California Earthquake Probabilities.
The 1989 Loma Prieta quake, which was centered about 60 miles (97 kilometers) south and registered 6.9 on the Richter scale, damaged highways and caused fires, and closed the San Francisco-Oakland Bay Bridge, according to the prospectus.
The earthquake bonds would provide a reliable water supply for fires and disasters by improving deteriorating pipes, hydrants, reservoirs and pumps built after the 1906 earthquake. They would go toward bolstering fire stations and replacing an emergency-command center with an earthquake-safe building, according to the prospectus.
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