Report: Despite Drought, California Economy Is Healthy

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SAN FRANCISCO — California's 2014 drought is estimated to cost the state more than $2 billion, but its economy is still doing well, according to a municipal research report from Bank of America Merrill Lynch.

Recent storms and heavy rains are so far little more than a drop in the bucket in the face of the historic drought.

As of Dec. 2, over 99% of the state was experiencing a drought, according to the US Drought Monitor, and over 55% is considered in an exceptional drought.

"While we do not predict here that the precipitation California has experienced over the past two weeks will break the drought, it certainly helps," the BofA Merrill Lynch analysts said in a report released Friday.

According to a recent study from the UC Davis Center for Watershed Sciences, the total economic impact of the drought for 2014 is likely to be $2.2 billion with $810 million due to crop revenue losses and $454 million due to additional pumping costs.

The drought is also expected to cause the loss of roughly 17,000 jobs, concentrated primarily in seasonal and part-time jobs in agribusiness.

"$2.2 billion in economic losses is, when compared to the state's [gross domestic product], rather insignificant," the report said. "California's GDP is roughly $2.05 trillion as of 2013, which, when compared directly with other countries, would make the state's economy the eighth largest in the world."

While drought conditions have intensified, the state's GDP continues to increase, growing 2% in 2013, following 2.7% growth in 2012, and 1.7% growing in 2011, according to the US Bureau of Economic Analysis.

"As such, $2.2 billion in losses is easily, though not lightly, absorbed," analysts said.

The drought has not damaged the state's bond ratings, which are Aa3 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings.

Standard & Poor's upgraded the rating on Nov. 5 to A-plus from A, with a stable outlook, following voters' adoption of California's rainy day stabilization fund.

The credit ratings of state and local water agencies have also not been significantly impacted by drought conditions.

Moody's maintains a stable outlook on the sector for the near-term and said the state's water utilities will be able to offset the decline of water sales due to greater water conservation with rate increases.

The agency said that individual credit quality trends will vary, but the sector on average will maintain a stable fiscal profile through at least 2016.

Standard & Poor's and Fitch have also been monitoring the drought and have continued to maintain their stable outlook on the water utility sector, saying the drought is not likely to pressure ratings.

In a Dec. 10 report, Fitch Ratings said that for the first time in five years, municipal water utilities broke even, "with annual income improving enough this year to fully cover bills and maintain existing infrastructure."

"While this has been supported by low capital spending, it has also contributed to an increase in the average age of utilities' infrastructure," said Doug Scott, a managing director at Fitch Ratings.

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