LOS ANGELES — Fitch Ratings upgraded California's issuer default rating to AA-minus from A-plus Friday, saying the state "is fundamentally better positioned to withstand a future economic downturn than in prior recessions due to numerous institutional improvements."
The outlook is stable.
The upgrade comes ahead of plans to price $2.7 billion in general obligation bonds on Aug. 30.
"The upgrade is evidence that California's credit continues its steady upward trend," California Treasurer John Chiang said in a prepared statement.
Fitch last upgraded California's GO rating to A-plus from A on February 2015.
The upgrade means that Fitch's rating is now at parity with the AA-minus level ratings of Moody's Investors Service and S&P Global Ratings.
"I am gratified that all three ratings clearly acknowledge the progress the governor and legislature have made in putting our financial house in order," Chiang said.
"Strong fiscal management is the bedrock of sustainable prosperity, it not only saves taxpayers money, but allows us access to more affordable capital to rebuild our crumbling infrastructure and to invest in our future," Chiang said.
The upgrade "reflects a combination of positive credit developments and application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016," according to Fitch's ratings report.
The AA-minus rating "reflects California's large and diverse economy that supports strong, albeit cyclical revenue growth prospects, solid ability to manage expenses through the economic cycle, and a moderate level of liabilities."
The state has demonstrated strong budget management during a period of economic recovery and expansion, using temporary tax revenues to eliminate the overhang of budgetary borrowing that had accumulated through two recessions, Fitch analysts wrote in the report.
Institutionalized changes to fiscal operations, when combined with the ongoing economic and revenue recovery, have enabled the state to materially improve its financial position, enhancing its ability to address future fiscal challenges, analysts wrote.
The upgrade affects $74.9 billion in outstanding GOs.
Fitch has also upgraded outstanding lease obligations and other bonds related to the state issuer default rating.
The rating agency cited the state's dependence on income tax and thus capital gains, which results in volatility in revenues.
"California has a solid ability to reduce spending through the economic cycle, although its flexibility is somewhat more restricted than is true for most states due to constitutional requirements for funding education and voter initiatives that limit state discretion," analysts said in the report. "The rating is sensitive to the state's ability and willingness, both within the legislative and executive branches, to maintain fiscal discipline throughout the economic cycle."
The state's latest economic outlook, released with the May 2016 revision to the Governor's budget proposal, foresees continued moderate improvement in the economy; unemployment declining but still higher than the national rate; and continued recovery in the housing market.
Strong economic fundamentals are the basis for a revenue profile that is likely to grow at or above the national average over time, Fitch analysts wrote.
California's tax revenues, adjusted for the estimated impact of tax policy changes, grew at a pace that exceeds national GDP growth over the 10 year period ending in 2014. Fitch said it expects continuation of this trend.
