California gets its second upgrade in two months
California received further evidence in a ratings upgrade that it has recovered from the bad old days of a decade ago when the state was being compared to Greece and its ratings fell.
Moody's Investors Service upgraded California's general obligation bonds to Aa2 from Aa3 Monday, citing the state’s massive, diverse and dynamic economy, corresponding growth in revenue and its commitment to building reserves and paying down debt.
The state’s budget reserves and liquidity have never been stronger, revenue continues to grow and the state is using a portion of that to pay down debt and build reserves, rather than expanding spending up to that amount, said Matt Butler, a Moody’s analyst.
The upgrade comes ahead of the state’s plans Wednesday to sell $1.1 billion in taxable GOs competitively. The bonds will be sold in two tranches with $680.5 million of new money and a $459.9 million refunding.
Fitch upgraded California’s GO rating in August to AA from AA-minus while maintaining a stable outlook. The state holds an AA-minus rating with a stable outlook from S&P Global Ratings.
The ratings reflect an upward climb over the past decade. Its ratings had fallen after the economy crashed in 2008.
S&P dropped California to A-minus in January 2010. The ratings fell to BBB and Baa1 from Fitch and Moody’s in 2009.
Moody’s had elevated its outlook to positive in June 2018, which indicates conditions are favorable for an upgrade. It revised the outlook to stable Monday when it announced the upgrade.
Butler noted that the ratings agency revised the outlook upward to positive last summer knowing that a new governor and administration could result in different priorities that bring increased spending. Gov. Gavin Newsom took office in January.
"California is showing that it is possible to take bold action to tackle the affordability crisis, climate change, and other challenges all while living within our means,” Newsom said in a statement about the upgrade. “We are advancing progressive values while growing our rainy day fund, paying down pension liabilities and eliminating our state’s wall of debt.”
The current budget continues the practice established in recent years of prioritizing paying down debt and building reserves with surplus revenue, Butler said.
California State Treasurer Fiona Ma lauded Newsom's commitment to fiscal prudence in a statement.
The state’s efforts to pay down debt and build reserves “will make the state more resilient and ensure that we are better prepared to deal with whatever the global economy has in store in the future,” Ma said.
The rating also incorporates the state’s revenue volatility from its heavy reliance on income taxes and social challenges including a high rate of poverty and expansive support of the low income population, which could present difficult spending decisions in a recession, Moody’s analysts wrote.