LOS ANGELES — California's record-breaking drought will have a negative impact on agriculture-dependent areas in the state, but it will not substantially affect tax revenues, Moody's Investors Service said in a report.
"We do not believe the current drought will have a material adverse impact on the state or local governments," Emily Raimes, vice president and senior credit officer, said in the report, released Tuesday. "However, if the drought persists in its current severity for several years, the state's and local governments' economies and finances would feel the pressure."
Gov. Jerry Brown declared a drought emergency in January and has since signed new water preservation measures into effect. The May revision of his budget proposal includes an additional $142 million of general fund spending related to the drought.
Moody's said the current drought's economic effects will mainly occur in counties with high concentrations of agricultural production and jobs, mostly in California's Central Valley.
The counties with the highest gross agricultural production value in California include Fresno, Kern, Tulare, Monterey, and Merced.
However, the drought is not likely to materially reduce revenues for most cities and counties, even those with agricultural concentration, Moody's said.
"City and county general revenues come primarily from property and sales taxes," Raimes said. "Fluctuations in property tax revenues generally lag the economy, and any material declines in property taxes from the drought would not occur immediately."
In addition, agricultural wages and salaries are generally a modest share of a county's total income base, so the sales tax impact is likely to be limited, the report said.
For the state, agriculture makes up a very small portion of the state's revenues, which mostly come from personal income taxes. Income in the agriculture sector is relatively low, and the impact of the drought on state revenues is likely to be dwarfed by changes or trends in the finance, housing or technology sectors, Moody's said.
The report only reflects the drought to date, but if conditions continue for another year or two at the same severity, Moody's said the state's agriculturally concentrated regions will be highly challenged financial and economically.
"A persisting drought would make it increasingly difficult for farmers to utilize short-term measures to address water supply issues and could lead to significantly larger losses in farm income and employment," Raimes said. "For a city or county with a large agricultural base, a prolonged drought could lead to material revenue losses."
