Fitch Ratings assigns an 'F1' rating to $10 billion in State of
California revenue anticipation notes (RANs) as follows:
--2012-13 RANs series A-1;
--2012-13 RANs series A-2.
Par amounts for each series will be determined prior to sale, expected
via negotiation on or about Aug. 16, 2012. Final maturity for series A-1
is expected to be May 30, 2013, and final maturity for series A-2 is
expected to be June 20, 2013.
The notes are payable from unapplied moneys of the general fund,
including transfers and internal borrowing, subject to the prior payment
of schools and other priority payments. The notes are not general
obligations of the state.
KEY RATING DRIVERS
--SUFFICIENT COVERAGE BY BORROWABLES: Coverage of maturing notes is
based on borrowable resources outside the general fund, rather than the
general fund itself. Borrowable balances have grown in recent years and
coverage by forecast fiscal year (FY) 2012 - 13 borrowables is
sufficient, although severe underperformance in the general fund without
offsetting actions could strain this cushion.
--REVENUE UNCERTAINTIES REMAIN: Risks during FY 2012 - 13 include those
posed by ongoing economic uncertainty, personal income tax cyclicality
and the realization of budgeted revenue from temporary personal income
and sales tax increases that require voter consent this November.
--STRUCTURAL SOLUTIONS HELPING BUDGET: California's adopted budget
incorporated sizable recurring spending cuts to achieve forecast
balance, in addition to temporary tax increases, as the state continues
to make progress toward structural balance. Achievability and
sustainability of budgeted savings remains uncertain.
--EXPANDED CASH FLEXIBILITY: The state has continued to expand its
flexibility to address near-term cash flow weakness, and the state's
controller has extensive powers to defer payments or issue IOUs to
The 'F1' rating on California's FY 2012 - 13 RANs reflects sufficient
coverage of maturing notes provided by cash resources outside the
general fund that are borrowable for general fund purposes. Forecast
available borrowable resources have grown materially in recent years and
are not affected by the key general fund uncertainty, whether state
voters consent to temporary personal income and sales tax rate increases
on the November 2012 ballot, the rejection of which would trigger
spending cuts that only partly offset the foregone tax revenues. The
state's cash outlook prudently forecasts both possible ballot outcomes
as well as the possibility that some key budgetary solutions cannot be
Despite lingering general fund revenue and budgetary uncertainty, the
state's cash flows have continued to stabilize since the severe fiscal
crisis it faced in the recession and its forecast assumptions for FY
2012 - 13 appear reasonable. State actions in the last two fiscal years
have narrowed its longstanding structural budget gaps. The state
continues to benefit from the expanded cash management tools implemented
in recent years and its growing pool of borrowable resources, providing
additional cash flow cushion in the event of unforeseen general fund
The notes are fixed rate and non-callable, and are expected to be
offered in two series maturing no later than June 20, 2013. Series par
amounts and maturity dates will be determined upon final sale. The notes
are secured by unapplied moneys in the general fund, including transfers
and internal borrowing, and subject to prior use for schools and higher
education, debt service on GO bonds and commercial paper, and
reimbursement of advances to the general fund from special funds as
required by law. In addition, the notes carry a back-up pledge of the
state to issue revenue anticipation warrants (RAWs) if necessary. The
notes are not general obligations of the state.
California's adopted budget for FY 2012 - 13 incorporated $16.6 billion
in budgetary solutions, including $6 billion in new revenues, of which
$5.6 billion is the net impact of temporary personal income and sales
tax rate increases that are subject to voter consent in November 2012.
In light of the uncertainty posed by the November tax revenue initiative
(Prop. 30), the state's cash flow forecast for FY 2012 - 13 includes
both a scenario based on the budget as adopted (baseline forecast) and a
scenario in which voters reject the budget's temporary tax rate
increases, triggering automatic spending cuts (trigger forecast). Other
propositions on the November ballot may likewise affect general fund
Under the baseline forecast, the $10 billion in notes for FY 2012 - 13
(which began on July 1, 2012) represent 10.1% of forecast receipts.
Projected unused borrowable funds after note repayment are forecast at
$13.4 billion and together with note proceeds provide 2.3 times (x)
coverage for the maturing notes. Unused borrowable funds at year-end
after note repayment equal approximately 13.5% of cash flow, an
indication of the margin by which general fund receipts or disbursements
could diverge from the forecast and still provide 1x coverage on
maturing notes without any other action on the part of the state.
Under the forecast that assumes automatic cuts are triggered, projected
unused borrowable funds after note repayment are forecast at $11.2
billion and together with note proceeds provide 2.1x coverage for the
maturing notes. Unused borrowable funds at year-end after note repayment
equal approximately 12.3% of cash flow. Under either forecast scenario,
the state's pool of available borrowable funds at year-end, forecast at
$19 billion, is above the $17.4 billion forecast when the FY 2011 - 12
notes were issued.
Under the baseline forecast, cash receipts are forecast to rise 13% from
actual FY 2011 - 12 receipts, to $99.2 billion, with the revenue impact
of temporary taxes benefiting cash flows beginning in January 2013.
Disbursements would rise 6.7%, to $95.2 billion. Under the trigger
forecast, cash receipts would rise 3.8%, to $91.1 billion, and
disbursements would rise 0.1%, to $89.3 billion. The $6 billion in
trigger cuts would be implemented beginning in January 2013, although as
with other budgeted solutions Fitch believes full implementation of all
triggered cuts may not be achievable. Under either scenario, the state
has assumed that only portions of cash receipts from the budgeted
dissolution of local redevelopment agencies and from savings contingent
on federal approval are received during the fiscal year.
Despite the state's slow emergence from the recession, actions taken in
recent years have materially expanded the state's discretion to manage
the timing of payments and have augmented borrowable funds available for
maturing notes, key factors supporting the note rating. Deferrals of
disbursements within FY 2012 - 13 provide $2.7 billion in flexibility,
and the state has additional unused authorization for deferrals. Other
deferrals from one fiscal year into the following have continued, and
include $8.2 billion to $10.4 billion (in the baseline and trigger
forecasts, respectively) in public education spending to be deferred
into FY 2013 - 14. Legislative and administrative action to expand
borrowable funds yielded an estimated $2.5 billion in additional
borrowables in FY 2011 - 12.
The 2012 - 13 notes are nearly double the $5.4 billion in 2011 -12
series A notes issued a year ago. Actual FY 2011 - 12 cash receipts
underperformed the state's initial forecast from the start of the fiscal
year, the result of the state's inclusion of $4 billion in 'unallocated'
receipts in the adopted budget. Although the state implemented $880
million in triggered cuts, below the level it originally sought, erosion
of revenues and difficulty achieving certain spending solutions led to
the controller taking mid-year action to augment cash balances,
including a $1 billion cash flow borrowing through private placement.
Although the general fund ended the fiscal year without a cash balance
and with loans from borrowable funds of $9.6 billion, borrowable
balances climbed to $20.8 billion at year-end, from $17.4 billion
assumed at the start of the fiscal year.
For more information on the state's general credit quality, please see
Fitch's press release dated Aug. 3, 2012, 'Fitch Affirms California GO
Bonds at 'A-', Outlook Stable,' at www.fitchratings.com.
Additional information is available at www.fitchratings.com.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
Criteria' (Aug. 15, 2011);
--'U.S. State Government Tax-Supported
Rating Criteria' (Aug. 15, 2011);
--'Rating U.S. Municipal
Short-Term Debt' (Dec. 8, 2011).
Applicable Criteria and Related Research:
State Government Tax-Supported Rating Criteria
U.S. Municipal Short-Term Debt
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