California revenues get boost from stock market in 2018, but volatility in revenue stream remains a concern, says Gabriel Petek, a managing director for S&P Global.
S&P Analyst Gabriel Petek said the fiscal recovery plan engineered by Gov. Jerry Brown doesn't so much rely on extraordinary revenue growth as it capitalizes on it.

LOS ANGELES - California plans to price $1.9 billion of general obligation bonds next week, bolstered by upbeat rating reports including a Fitch Ratings upgrade.

Fitch boosted the state's GO rating to A-plus from A late Wednesday, assigning a stable outlook.

Standard & Poor's, which affirmed California's A-plus rating and stable outlook, revised California's financial management assessment to "good" from "standard," which means "that the government maintains many best practices deemed as critical to supporting credit quality, particularly within the state's Department of Finance," analysts Gabriel Petek and David Hitchcock wrote Monday.

The state's plans to price $1.1 billion of refunding bonds and $790 million in new money GOs in what will be the first deal under Treasurer John Chiang, who took office in January.

Moody's Investors Service, which boosted the state's rating in June, affirmed its Aa3 rating.

All assign a stable outlook.

The state plans to take retail orders Tuesday followed by institutional pricing Wednesday, according to Jacob Roper, a spokesman in the state treasurer's office.

Bank of America Merrill Lynch and Morgan Stanley are joint senior managers. Fidelity is the co-senior manager.

Orrick Herrington & Sutcliffe is bond counsel. Public Resources Advisory Group is the financial advisor.

The fiscal recovery plan engineered by Gov. Jerry Brown doesn't so much rely on extraordinary revenue growth as it capitalizes on it, Petek said.

The multiple-year fiscal recovery plan is highlighted, from a credit perspective, by two features in particular, Petek said.

"First, it has brought the state's permanent revenue and expenditure baselines into alignment," Petek said. "Second, lawmakers have used the revenue influx under Proposition 30's temporary tax increases to pay down much of the budgetary debts the state accumulated during the 2000s."

Voters approved the temporary sales and income tax increases in 2012.

Petek's one caveat is that the budget process will loom large in California's credit profile.

While lawmakers' reining in the state's previous spending trajectory was the key to California achieving operating balance, "reversing course on this front could lead the state back toward misalignment," Petek said.

Moody's issued a report on Feb. 18 saying credit analysts anticipate that the Golden State's economic growth should continue to outpace the country through 2017.

Wells Fargo Securities LC Economics Group issued a report Tuesday that also concluded that California's economy will continue to outperform the national average.

"The economic growth in the last two or three years has outpaced the nation, and we expect above-average growth to continue," Moody's analysts Emily Raimes and Robert Azrin wrote in the report.

"Liquidity available to the state's general fund for the current fiscal year through January was over $17 billion, or 10.6% above the state's forecast," Moody's analysts said.

Brown's proposed budget, which uses the revenue strength to build up reserves and pay down state debts such as those incurred through intrafund borrowing, also positions the state well for the next downturn, according to Moody's.

The "surge in technology-related industries has had huge spillover effects in the Bay Area and San Diego, with construction projects cropping up to meet rising demand," according to Wells Fargo economists. "The state has proved to be much more than a one-trick pony, however, with gains seen in most industries.

The state also seems to be weathering its challenges rather gracefully including the recently resolved dispute with port workers in the state, Wells Fargo economists said.

With dock workers rapidly removing the backlog that built up at ports during the heated recent contract negotiations between shippers and longshoremen, economists said it should provide a boost to the trade-driven Inland Empire east of Los Angeles.

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