SAN FRANCISCO — Ratings on many of California's cities continue to recover from the recession, but credit rating distribution in the state remains uneven, according to a report from Standard & Poor's.
The agency's implementation of revised local government general obligation criteria allowed it to take a look at the credit performance of cities throughout the state over the past year.
On the whole, the report found that most cities are continuing to recover, with regional differences.
"As in previous recoveries, the urban coast regions have regained jobs and economic activity more swiftly than their inland and rural counterparts have," analysts Sarah Sullivant and Matthew Reining said in the report released Thursday. "The lack of a uniform economic recovery makes generalizing about credit trends difficult even at the state level."
Areas such as the Central Valley, the far north, and the Inland Empire could continue to face challenges as they seek to balance spending pressure with slower revenue growth, they said.
Analysts also found that rating distribution in the state remains bifurcated, with a higher percentage of cities receiving both its highest and lowest ratings compared with the rest of the nation.
"A historically robust real estate market combined with a high proportion of educated residents and high-value industries has resulted in relatively strong economic scores. At the same time, statewide limitations on revenue flexibility, higher debt burdens, and a heterogeneous economic landscape may contribute to the proportionately larger set of distressed cities in the state," the report said.
Historically, a disproportionately large share of California cities have received the highest ratings from Standard & Poor's, which was still the case after the 2013 criteria change. Around 24% of California cities are rated AAA by Standard & Poor's, and 21% are rated AA-plus.
That compares to 10.3% and 14.8%, respectively, for the rest of the country.
Analysts said they contribute California's strong representation at the high end of the rating scale in large part to its economy, which features higher income and wealth levels than most other states, on average.
At the same time, the state's rating distribution is also heavier at the bottom compared with other states, with a greater percentage of the lowest-rated cities. Standard & Poor's rates 5.5% of California cities at BBB-plus or lower, compared with only 3.1% nationwide.
"We generally consider these distressed credits have limited financial flexibility, high debt or contingent liability risks, or liquidity constraints," analysts said. "For example, all of the cities we consider to have a limited capacity to cut expenditures in response to fiscal pressure are among this 6%, as are those with persistent structural imbalances, significant contingent liabilities, or very weak management conditions."
Ratings may also be low for cities that have structural imbalances with no credible plan to address them, or those that have particularly high contingent liabilities or debt burdens. The list also includes cities which have been recently involved in a petition for bankruptcy, such as Stockton and Mammoth Lakes.
