California Should Continue to Outperform Though 2017: Moody's

LOS ANGELES — California will experience favorable fiscal conditions through 2017 benefitting both the state and its local governments, according to Moody's Investors Service.

"The economic growth in the last two or three years has outpaced the nation, and we expect above-average growth to continue," Moody's analysts Emily Raimes and Robert Azrin wrote in a report Feb. 18.

The Golden State is expected to outpace the country with economic growth fueled by technology, the housing market and low oil prices.

Moody's rates the state Aa3 with a stable outlook. The largely positive report did not mention whether the agency might consider another boost to the state's rating.

"We expect personal income, a core driver of state tax revenue, to grow at a faster rate than the nation through 2017," the analysts said. "If low oil prices continue, it will provide additional stimulus to the state's economy, although local governments heavily exposed to the oil production sector may be adversely affected."

Basic aid school districts in Kern County, the state's most oil-dependent county, which rely heavily on property taxes, could also be negatively impacted, according to Moody's.

Strong revenue growth has dramatically improved the state's cash position. The growth largely came from personal income taxes resulting from state employment growth, stock market gains and a strong technology sector anchored in Silicon Valley. Dependence on those revenue sources makes California more volatile than the rating agency's Aa1-rated states, Moody's said.

"Liquidity available to the state's general fund for the current fiscal year through January was over $17 billion, or 10.6% above the state's forecast," analysts said.

Gov. Jerry Brown's proposed budget also uses the revenue strength to pay down state debts and build up reserves, which analysts said will position the state well for the next downturn.

The governor also budgeted to pay down the remaining $992 million in deferrals to school districts. Districts, who issued short-term notes to make up for the delay, will likely discontinue that practice, according to analysts.

Analysts found Brown's education planning and proposed clean-up legislation for successor agencies to the dissolved redevelopment agencies to be particularly favorable at the local level.

Increased spending for retiree healthcare and pension contributions was deemed manageable by analysts for both the state and local governments assuming they continue to rein in costs. Brown's proposal to scrap the state's bond program that helps pay for K-12 and community college construction projects could be a credit negative for school districts though, analysts said.

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