Despite the slings and arrows of negative headlines, the state of California remains a solid municipal credit, Payden & Rygel vice president Travis McGahey said in a new report.
He said he drilled down into the state's risk of bond default or severe credit deterioration after hearing investor concerns about California's state revenue slowdown, reduced federal funding, tech layoffs and rising costs for goods and wages
The upshot of the report published by the Los Angeles-based global investment firm is that the risk of severe credit deterioration and bond defaults remain low.
"Despite uncertainty, California retains strong credit fundamentals with stable ratings, manageable deficits and conservative budgeting that supports bondholder confidence," McGahey said.
McGahey's worst case scenario would have Fitch Ratings and Moody's Ratings lowering the state to AA-minus and Aa3, matching S&P Global Ratings current AA-minus rating.
But he notes that all three rating agencies have affirmed the ratings within the past two months and retained stable outlooks.
"Importantly, had federal policy uncertainty been deemed a material risk, it is likely the agencies would have revised their outlooks to negative or placed the ratings on CreditWatch," McGahey said. "Nevertheless, we are watching for potential reactions to the recent May budget revision, but expect a low probability of a one notch downgrade in a worst case scenario."
Though McGahey said the state's credit profile "is softening slightly, it continues to demonstrate resilience, supported by a vast and diversified tax base, substantial reserve levels, and long-term liabilities that we consider both moderate and manageable."
California state income tax collections are heavily weighted toward high-income taxpayers, and in the past have been juiced by initial public offerings of stocks from the tech sector.
The steep drop in IPOs from the spike in 2021 when California realized $47.4 billion in IPO volume to the $5.7 billion in 2024, estimated in a
IPO growth to $20.9 billion in 2019 from $7.2 billion in 2018 was viewed as organic by Payden & Rygel analysts, while growth in 2020 and 2021 could be attributed to the exceptional liquidity transferred from the federal government to state and local governments, corporations and individuals as part of COVID-19 recovery efforts, McGahey said.
California IPO activity also tends to be in line with national trends, not an outlier, he said.
Nationally, there were 140 IPOs through May, said Chris Thornberg, founder of Los Angeles-based Beacon Economics, which puts the country on track to beat the past three years. IPO volume fell to $200 million in California in 2022 and $7.8 billion nationally, according to Payden & Rygel's report.
That's well down from the 1,000 IPOs in 2021 nationally, Thornberg said.
"IPOs are a good way of taking a midsize company and launching it into the hemisphere and it has a nice effect on the state of California," Thornberg said. "Think of all the taxes (Meta CEO) Mark Zuckerberg had to pay."
Despite the sharp swings in IPO volume over the past five years, growth in public offerings historically have been viewed as an indicator of business confidence in the economy, according to a SIFMA
Thornberg's Beacon Economics isn't buying into the doom and gloom around tech layoffs and what it means for the state's economy.
California Employment Development Department data included in Beacon's spring outlook on the state showed that the information sector, which includes both tech and film, has been contracting. While nonfarm employment outside the information sector has gradually returned to January 2020 levels, information jobs, after surging through 2021 and early 2022, have since declined and are now roughly 9% below where they stood in January 2020.
"These losses have mostly come from small to mid-sized firms in the sector, which have lost 45,000 workers (a 12% drop in employment) and 5% of their establishments over the past four years," according to Beacon Economics' report. "Large firms (those with over 1,000 employees) on the other hand have fared well, with a 9% employment increase and a 64% jump in wages over the same period."
Tech has bottomed out from the highs of 2021-22, but it's stabilizing, 2024 was a good year for venture capital, said Thornberg, adding that the latest job numbers showed there were 200,000 tech job openings, which is higher than 2022.
"Everything is down, but that's because 2022 was a bizarre year," Thornberg said.
"We were sitting on trillions of liquidity – and tech companies were acting like we would never leave our homes again." he said.
"I just see it going back to normal levels of activity," Thornberg said. "When home prices start to fall, we can talk about the demise of tech."
The median price of a home in Santa Clara County, where Apple and Alphabet are among the many Silicon Valley firms with headquarters, was $2.02 million in the first quarter of 2025, according to a
The state's inability to gain traction on its housing shortage continues to be an issue, along with the volatility in state revenue sources because of its dependence on personal income tax receipts and capital gains taxes paid by its highest earners, Thornberg said.
Personal income taxes had grown from about one-third of the state's tax revenues in 1980 to 39% by 1990 and today make up 44% of the state's total tax revenue, according to Beacon Economics' first quarter report. In comparison, the report says, personal income across all U.S. states made up 30% of total state tax revenue.
The share of revenues coming from capital gains tends to rise and fall with the stock market, Thornberg said.
Capital gains have fluctuated from 3% of the general fund in 2009-2010, to 13% in 2021-22, and are projected to drop to 8% through 2025-2026, which still represents a significant revenue source for a state with a general fund of nearly $230 billion, according to the Beacon first quarter first report.
"The problem is there is too much reliance on high earners, which creates volatility," Thornberg said.
"This wouldn't be a problem if the state would manage for the volatility and sock the money away, which it should have done in 2022 when it had the large surplus, or pay down debt," he said.
"Last year, they had the opportunity to backfill again, but they pretended everything was hunky dory and here we are going into another hole," Thornberg said in an interview. "There were a dozen moments when (California Gov. Gavin) Newsom could have stood his ground. The budget will be a mess next year too."
Newsom used the term "
Thornberg said Trump's "wave of policy gyrations" aren't sufficient to cause a recession.
He did say a national recession could compound California's headwinds – as well as increased costs for Medi-Cal, the state's Medicaid program, if budget cuts to the program approved in the House reconciliation bill are included in the Senate version.
The Department of Government Efficiency driven spending cuts are minuscule relative to the scale of federal spending, Thornberg wrote in a report on the likelihood of a federal recession.
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Beacon Economics forecast a 30% likelihood of a recession in the next 12 months in the report on federal recessionary risk penned by Thornberg. The report notes that the Wall Street Journal's economic forecasting survey has a 45% likelihood as the average from economists.
"Our lower estimate does not mean that we are more optimistic than other forecasts — we are very worried about the health of the U.S. economy," Thornberg wrote. "Beacon Economics is more worried about how the rising instability in the markets will impact chronic problems that have been building in the U.S. economy for years."
The chronic issues are asset bubbles, including the overvalued stock market and cryptocurrency, Thornberg said. Those asset bubbles, along with government deficits, are inflating household net worth to an all-time high, he said.
Thornberg wrote the focus should be on whether the Trump administration attempts to close the federal deficit, cool the over-heated asset markets and counsel Americans to spend within their means.
He added, however, that the unknown is whether the uncertainty being created by Trump's policy gyrations is "sufficient to ignite a broader financial crisis through the nation's external accounts, i.e. the value of the dollar."
If Trump backs off his tariff plans, Thornberg said recessionary risks still loom if the Republican-controlled Congress doesn't take action to reduce the deficit. So far the House, GOP in
"The imbalances that are building today are as profound and dangerous as they were in the run-up to the Great Recession," Thornberg wrote. "This time, however, the source of the pain is on the public, rather than the private side of the ledger, which means how it shakes out will differ, but the size of the shock could end up being even larger."
