An Overview of San Francisco’s Debt
What Is Bond Financing?
Bond financing is a type of long-term borrowing used to raise money for projects. The City receives money by selling bonds to investors. The City must pay back the amount borrowed plus interest to those investors. The money raised from bond sales is used to pay for large capital projects such as fire and police stations, affordable housing programs, schools, libraries, parks, and other city facilities. The City uses bond financing because these buildings will last many years and their large dollar costs are difficult to pay for all at once.
Types of Bonds. There are two major types of bonds — General Obligation and Revenue.
General Obligation Bonds are used to pay for projects that benefit citizens but do not raise revenue (for example, police stations or parks are not set up to pay for themselves). When general obligation bonds are approved and sold, they are repaid by property taxes.
Revenue Bonds are used to pay for projects such as major improvements to an airport, water system, garage or other large facilities which generate revenue. When revenue bonds are approved and sold, they are generally repaid from revenues generated by the bond-financed projects, for example usage fees or parking fees. The City’s revenue bonds must be approved by a majority vote. There is no revenue bond on this ballot.
What Does It Cost to Borrow?
The City’s cost to borrow money depends on the amount borrowed, the interest rate on the debt and the number of years over which the debt will be repaid. Large debt is usually paid off over a period of 10 to 35 years. Assuming an average interest rate of 6% the cost of paying off debt over 20 years is about $1.73 for each dollar borrowed — $1 for the dollar borrowed and 73 cents for the interest. These payments, however, are spread over the 20-year period. Therefore inflation reduces the effective cost of borrowing because the future payments are made with cheaper dollars. Assuming a 4% annual inflation rate, the cost of paying off debt in today’s dollars would be about $1.18 for every $1 borrowed.
The City’s Current Debt Situation
Debt Payments. During fiscal year 2016–2017 property tax payers in the City will pay approximately $411 million of principal and interest on outstanding bonds of the City and the other issuers of general obligation bond debt (these are the San Francisco Community College District, San Francisco Unified School District and Bay Area Rapid Transit District). The property tax rate for the year to provide for debt and special funds debt requirements will be 17.59 cents per $100 of assessed valuation or $1,043 on a home assessed at $600,000.
Legal Debt Limit. The City Charter imposes a limit on the amount of general obligation bonds the City can have outstanding at any given time. That limit is 3% of the assessed value of taxable property in the City — or currently about $6.35 billion. Voters give the City authorization to issue bonds. Those bonds that have been issued and not yet repaid are considered to be outstanding. As of August 1, 2016, there was $2.011 billion in outstanding general obligation bonds, which is equal to 0.95% of the assessed value of taxable property. There is an additional $1.62 billion in bonds that are authorized but unissued. If these bonds were issued and outstanding, the total debt burden would be 1.71% of the assessed value of taxable property. Bonds issued by the School District and Community College District and Bay Area Rapid Transit District (BART) do not increase the City’s debt burden for the purposes of the Charter limit, however they are repaid by property taxes (see Prudent Debt Management below). Part of the City’s current debt management policy is to issue new general obligation bonds as old ones are retired, keeping the property tax rate from City general obligation bonds approximately the same over time. This policy applies to the bonds of the City and County, but not those of other governments, such as the School District, BART, or City College District.
Prudent Debt Management. Even though the City is well within its legal debt limit in issuing general obligation bonds, there are other debt comparisons used by bond rating agencies when they view the City’s financial health. These agencies look at many types of local and regional debt that are dependent on the City’s tax base including our general obligation bonds, lease revenue bonds, certificates of participation, special assessment bonds, BART and school and community college district bonds. The “direct debt ratio” which includes direct debt and other long term obligations and excludes special assessment bonds, BART and school and community college district bonds, is equal to 1.47% of the assessed value of taxable property. This direct debt ratio is considered to be a “moderate” debt burden relative to the size of San Francisco’s property tax base. While this ratio is within the comparable benchmarks, the City needs to continue to set priorities for future debt to continue to maintain good credit ratings that, in turn, are a sign of good financial health.
Citizen Oversight of General Obligation Bonds
Voters must approve the purpose and amount of the money to be borrowed through bonds. Bond money may be spent only for the purposes approved by the voters.
For general obligation bonds issued by the City of San Francisco, the Citizens’ General Obligation Bond Oversight Committee reviews and reports on how bond money is spent. The nine members of the Committee are appointed by the Mayor, Board of Supervisors, Controller, and Civil Grand Jury. If the Committee finds that bond money has been spent for purposes not approved by the voters, the Committee can require corrective action and prohibit the sale of any authorized but unissued bonds until such action is taken. The Board of Supervisors can reverse the decisions of the committee by a two-thirds vote. The Controller may audit any of the City’s bond expenditures.
Prepared by Ben Rosenfield, Controller