LOS ANGELES - Fitch Ratings upgraded California general obligation bonds to A from A-minus Monday citing improved fiscal management and ongoing economic and revenue recovery.
The action affects $72 billion in outstanding debt. In connection with the upgrade, the outlook was revised to stable from positive.
“Fitch’s upgrade of California’s GO bond rating to A from A-minus is based on the institutional improvements made by the state in recent years, its disciplined approach to achieving and maintaining structural balance in recent budgets, and the consequent fiscal progress made to date by the state as it recovers from the severe budgetary and cash flow crisis of 2008-2009,” analysts said.
Notable fiscal management improvements since the financial crisis include a voter-approved change that allows simple majority state budget approval, various cash flow management tools, and successive years of timely budgets that have achieved structural gains.
The recently adopted budget for fiscal 2014 forecasts structural balance through June 30, 2014 and revenues are estimated to be $2.9 billion higher on a budgetary basis than the state’s adopted budget.
“This reflects the significant progress California has already demonstrated in its return to fiscal discipline," said state treasurer Bill Lockyer. "An improving economy has helped, but Governor Jerry Brown and the Legislature deserve credit for making difficult, but necessary spending decisions year after year, while voters provided key assistance by wisely supporting temporary tax increases.”
Fitch believes that the state's structural gains provide it with a greater capacity to address future fiscal and budgetary cyclicality.
However, analysts noted that California’s credit standing is likely to remain lower than most states for the foreseeable future given the magnitude of the state’s budgetary and financial challenges.
Fitch noted California’s wealthy economy, which is unmatched among U.S. states in its size and diversity. After severe, widespread recessionary conditions, growth has resumed, including to California’s housing market, analysts said.
California’s tax-supported debt is moderate, although it has grown in the last decade for infrastructure needs and budgetary borrowing, but pension-funding ratios have declined and contributions remain inadequate.
“The rating is sensitive to the continuation of the state’s recent fiscal discipline and its ability and willingness to continue addressing numerous fiscal challenges,” Fitch said. “Additional material progress on reducing budgetary borrowing, maintenance of structural balance and addressing key fiscal risks could result in rating improvement.”
Unexpected economic, revenue and cash flow weakness or a return to spending growth without regard to revenue volatility could pressure the rating.
While the state’s fiscal situation has significantly improved, Fitch views California as being a long way from a full recovery from the effects of two fiscal crises over more than a decade.
In addition to the state’s GO bonds, appropriation-supported bonds by ten of the state’s issuers were upgraded to A-minus with a stable outlook—one notch below the state’s GO rating.
Issuers that were upgraded to A-minus include the California Public Works Board, East Bay State Building Authority, Los Angeles State Building Authority, and Oakland State Building Authority, among others.
Appropriation bonds of the state issued by the California Judgment Trust, Shafter Joint Powers Financing Authority, and Taft Public Finance Authority were affirmed at BBB-plus.
Moody’s Investors Service rates California A1 and Standard & Poor’s assigns an A rating.