California economy and finances cited in Moody's outlook boost

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LOS ANGELES — California’s $87 billion in outstanding tax-supported debt now has a positive outlook from Moody’s Investors Service.

Moody’s revised the outlook from stable Monday as it affirmed California's Aa3 GO rating.

It also affirmed the A1 rating on the state’s outstanding lease debt, its outstanding appropriation debt, and outstanding school fund apportionment lease revenue bonds. The A3 rating also was affirmed on the outstanding debt of certain regional centers.

"The outlook for the State of California is positive and reflects the state's strongly performing economy and finances," Moody's analysts wrote. "Continued fiscal discipline in a healthy revenue environment or retention of reserves despite slowed revenue growth could support a higher rating within the next one to two years."

The state holds AA-minus ratings with stable outlooks from both S&P Global Ratings and Fitch Ratings.

An upgrade could come if the state demonstrates "commitment over the next one to two years to continued fiscal discipline that maintains structural budget balance and healthy budgetary reserves, and fortifies the state's capacity to weather an economic downturn," Moody's said.

An upgrade could come also if the state makes "governance changes that enhance the state's flexibility to respond to negative revenue variances in a timely manner," Moody's said.

The state’s Aa3 rating “incorporates California's position as a massive and diverse economy that has performed strongly relative to the rest of the nation over the past several years,” Moody’s said. "This performance supported robust revenue growth and the accumulation of healthy liquidity."

California had $74.2 billion of outstanding GO debt as of July 1, according to the State Treasurer's Office.

Analysts noted that the state’s $2.7 trillion gross domestic product accounts for 14% of the nation's economy. Its population of 39.5 million accounts for 12% of the nation's population.

The rating balances the state's improved financial position against its exposure to a highly volatile revenue structure and its vulnerability to changes in federal policy and funding, especially with regards to healthcare, according to the rating agency.

The rating further considers long-term liability and fixed cost burdens that are slightly higher than state medians, as well as a legislative supermajority requirement to raise new revenue, analysts wrote.

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