NEW YORK - Standard & Poor's Ratings Services revised its outlook on all long-term and underlying ratings for California to positive from stable. In addition, S&P affirmed its A-minus long-term ratings and underlying ratings (SPURs) on California's $73.37 billion of general obligation (GO) debt.
Simultaneously, S&P affirmed its A-minus and BBB-plus long-term ratings and SPURs on the state's $1.9 billion of Proposition 1A and $10.53 billion of appropriation-backed debt. S&P also affirmed its AAA/A-1-plus, AAA/A-1, and AAA/A-2 ratings on some of the state's GO variable-rate demand bonds.
The long-term component of the ratings is based jointly (assuming low correlation) on that of the obligor, California, and the various letter of credit providers. The short-term component of the ratings is based solely on the ratings on the letter of credit providers.
"We are revising the outlook because, barring any other credit deterioration, with think the state is poised for credit improvement -- and potentially a higher rating -- pending its ability to better align its cash performance and budget assumptions," said Standard & Poor's credit analyst Gabriel Petek.
"We believe that by downsizing its spending base, the state has corrected a significant portion of its budget imbalance. Improvement in the state's underlying fiscal position now largely hinges on whether the state can realize the cuts as reduced cash outflows and on whether its tax collections move closer to what is assumed in the state's budget. The majority vote budget process -- as demonstrated for fiscal 2012 -- also helps reduce the state's risk of very late budget enactment in our view. Late budgets had previously been a recurring source of liquidity stress because, without a budget, the state is generally precluded from pursuing its regular annual cash flow borrowing," added Petek.
The A-minus rating on the state's GO debt is low for a U.S. state and reflects S&P’s view that California is prone to encountering liquidity shortfalls. At this point, a higher rating is therefore contingent on the state's ability to better align its cash performance and budget assumptions. S&P thinks the groundwork is in place for this, but improvement to state liquidity has yet to fully materialize. The timely enactment of a fiscal 2013 budget with sufficiently credible deficit solutions -- such as definitive trigger cuts not subject to political negotiation after the state's November election -- to finance its annual cash flow borrowing would also help support a higher rating.
Despite having made substantive fiscal adjustments, weaker-than-budgeted cash flow trends led the state controller to declare recently that, without corrective action, the state would temporarily breach its $2.5 billion minimum daily cash cushion. The state controller also stated that he expects the shortfall to persist for approximately seven weeks, through mid-April, and that without a fix the state's cash would dip into negative territory as of March 1.
The current cash deficiency stems from a combination of underperforming tax revenues and unrealized spending reductions. Compared with state budget assumptions, these had reduced state cash resources by $5.2 billion through January.
According to the state controller, the situation necessitates new midyear cash solutions of $3.3 billion to help the state fulfill the demands on its liquidity. The controller, working with the department of finance and the treasurer's office, developed a cash management plan that the controller expects will restore the state's minimum daily cash balance of $2.5 billion.