Fitch Ratings affirms the 'A-' rating on approximately $73.1 billion in
general obligation (GO) bonds of the state of California.
Fitch also affirms the ratings of lease appropriation and other related
bonds of the state as detailed at the end of this release.
The Rating Outlook is Stable.
General obligations, for which the state pledges its full faith and
credit, subject to the prior application of moneys to the support of
public education; funds for education represent approximately half of
KEY RATING DRIVERS
--WEALTHY, DIVERSE ECONOMY: The economy is wealthy and unmatched among
U.S. states in its diversity and breadth. Growth has resumed after
severe, widespread recessionary conditions.
--HISTORY OF BUDGET AND CASH STRESS: State finances are subject to
periodic, severe budget and cash flow crises due to structural
imbalances, revenue cyclicality and institutional inflexibility.
--VOLATILE REVENUES: Revenues are volatile, notably the component tied
to personal income; voter consent to temporary tax rate increases would
further expose the state to personal income tax cyclicality. Modest
revenue growth has resumed since the downturn although the course of
future collections is uncertain.
--TANGIBLE STRUCTURAL PROGRESS: Deep spending cuts in the last two
adopted budgets have significantly lowered the state's structural
imbalance. Among many challenges to maintaining structural progress is
the state's historical inability to achieve and sustain budgeted
--VOTER INITIATIVES LIMIT FLEXIBILITY: Constraints imposed by voter
initiatives and a partisan policy-making environment have repeatedly
hindered timely, effective action on fiscal challenges.
--MODERATE DEBT BURDEN: Tax-supported debt is moderate, but has grown in
the last decade for infrastructure needs and budgetary borrowing.
California's 'A-' GO bond rating and Stable Outlook reflect its
persistent budgetary and cash challenges and limited fiscal flexibility
tied to ongoing structural deficits, and institutional constraints to
sustainable budget-making. These credit weaknesses are offset in part by
the size and breadth of the state's economy and tax base and the
strengths inherent in a state's broad powers.
Fiscal uncertainty has diminished as California's economic recovery has
strengthened and the state has taken repeated, material steps to narrow
structural gaps. Despite clear progress, credit uncertainties remain
considerable, including the strength of the state's nascent economic and
revenue recovery, whether voters consent to budgeted temporary tax rate
increases or trigger offsetting cuts, and the state's ability to fully
achieve and sustain budgeted gap-closing solutions. Voter consent on the
tax package in November could leave the state poised for further
structural gains, allowing it to begin repaying the sizable budgetary
borrowing accrued in the last decade, but would likewise expose the
state to further tax revenue volatility.
California's economy is unmatched in diversity. Recovery is taking hold
after a particularly deep and protracted recession, although economic
recovery remains uneven. June 2012 employment is up 2% from June 2011,
higher than the 1.3% national rate for the same period. Employment gains
are widespread, particularly in key service sectors, and construction
employment has returned to growth. However, California's unemployment
rate remains well above the national average, at 10.7% in June 2012 vs.
8.2% nationally. Personal income is also growing, with the first quarter
of 2012 rising 2.5% year-over-year, compared to 2.9% nationally. The
state's latest economic outlook, released in May 2012, foresees economic
activity in 2012 and 2013 accelerating after generally sluggish growth
in 2011, although the unemployment rate is expected to remain at
historically elevated levels.
California fiscal performance in recent decades has been marked by
cyclical revenue collections and periodic, severe budgetary and cash
flow crises. Resolution of the state's fiscal challenges has often been
delayed, reliant on non-recurring solutions, and constrained by
restrictive voter initiatives. The state's recent slow and uncertain
economic and revenue recovery, in contrast to the much stronger
post-recessionary experience in prior downturns, has resulted in
persistent fiscal strain. To date this has left the state with little
flexibility to begin making progress on paying down past budgetary
The state's last two budgets were adopted on a timely basis and
incorporated sizable recurring spending reductions, narrowing the
state's structural imbalance. The fiscal 2012 budget closed a cumulative
gap estimated in January 2011 at $26.6 billion (equal to 15.3% of
baseline general fund revenues). The plan relied on $15 billion in
spending reductions along with an optimistic revenue forecast and
non-recurring items to achieve balance. Given underperformance of actual
revenues in the course of the year, spending cuts of approximately $880
million were triggered mid-year, enabling the state to quickly offset a
portion of the revenue underperformance. Nonetheless, the combination of
revenue erosion and an inability to achieve certain enacted solutions
required the controller to implement $3.3 billion in measures to augment
cash resources. The state estimates that fiscal 2012 closed with a
negative fund balance of $2.9 billion.
The adopted budget for fiscal 2013, which began on July 1, closed a gap
of $15.7 billion (equal to 17.8% of general fund revenues and transfers)
and leaves a forecast year-end available reserve of $948 million. The
$16.6 billion in adopted solutions includes recurring and non-recurring
spending reductions ($8.1 billion), revenue measures ($6 billion) and
other transfers and loans ($2.5 billion). The state's revenue outlook
assumes voter consent in November to temporary personal income and sales
tax rate increases, which would generate $8.5 billion in gross revenues
and $5.6 billion in net revenue for the general fund. Voter rejection of
the measures would trigger $6 billion in automatic spending reductions,
the vast majority of which would affect K-12 education.
Despite recent structural gains, considerable budgetary uncertainty
remains through fiscal 2013 and beyond. Enactment of the temporary tax
package could enable the state to make progress toward repaying the
sizable budgetary borrowing built up over the last decade, but would
also leave the state more reliant on volatile personal income tax
receipts. If the tax package is rejected by voters, triggered cuts would
absorb most, but not all, of the foregone revenues. Beyond the
achievability of the voter initiative, the state has consistently faced
challenges implementing and sustaining planned spending cuts due to
litigation, federal rejection of program changes, or other obstacles.
DEBT AND PENSIONS
California has a moderate but above-average debt burden, with net
tax-supported debt of approximately $92.7 billion as of July 1, 2012,
equal to 5.5% of 2011 personal income. The debt burden has risen over
the last decade due primarily to substantial GO bond issuance for
infrastructure and borrowing to cover budget gaps. Net tax-supported
debt excludes cash flow borrowing; the state plans to issue $10 billion
in revenue anticipation notes for cash flow later in August 2012, higher
than last year but generally consistent with recent experience.
System-wide funded ratios on a reported basis for the state's two main
pension systems, covering public employees and teachers, have eroded due
to investment losses. Based on their June 30, 2010 actuarial valuations,
the public employees' plan reported an 83.4% system-wide funded ratio
and the teachers' plan reported a 71.5% system-wide funded ratio.
Using Fitch's more conservative 7% discount rate assumption, funded
ratios for the two systems fall to 77% for public employees' and 66% for
teachers'. On a combined basis, net tax-supported debt and pension
liabilities attributable to the state are estimated by Fitch at 8.5% of
2011 personal income, just above the 6.6% median of Fitch-rated states.
Some reforms to contribution levels and benefits were adopted with the
state's fiscal 2011 budget, and both systems have reduced their discount
rate assumptions. Full actuarial contributions to the public employees'
system are legally required, but not for the teachers' system, leading
to consistent underfunding of the latter. The governor has proposed
wide-ranging reforms to state pensions that would delay retirement ages
and create hybrid options to lower the state's burden over time.
Today's affirmation of the state's GO rating at 'A-' with a Stable
Outlook also applies to the following:
--Cal-Mortgage Loan Insurance Division bonds;
--California Statewide Community Development Authority revenue bonds
(State of California Proposition 1A Receivables Program).
In addition, appropriation bonds of the state issued by the following
entities are affirmed at 'BBB+' with a Stable Outlook, one notch below
the state's GO rating:
--Public Works Board (except for those issued for the Regents of the
University of California);
--East Bay State Building Authority;
--Los Angeles State Building Authority;
--Oakland State Building Authority;
--Riverside County Financing Authority;
--Sacramento City Financing Authority;
--San Bernardino Joint Powers Financing Authority;
--San Francisco State Building Authority;
--Golden State Tobacco Securitization Corporation (series 2005A);
--California Judgment Trust;
--Shafter Joint Powers Financing Authority;
--Taft Public Finance Authority.
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.
In addition to the sources of information identified in the
Tax-Supported Rating Criteria, this action was additionally informed by
information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011);
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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