Upgrade affects over $86B in outstanding debt
New York, June 25, 2014 -- Moody's Investors Service has upgraded the rating on the State of California's
general obligation debt to Aa3 from A1. Moody's has also
upgraded various notched and related ratings (see list at end of report).
The outlook is stable.
SUMMARY RATING RATIONALE
The upgrade to Aa3 from A1 reflects the state's rapidly improving
financial position, high but declining debt metrics, adjusted
net pension liability ratios that are close to the state median,
strong liquidity, and robust employment growth. The Aa3 rating
also reflects the state's volatile tax revenue structure and governance
restrictions, in addition to certain recent governance changes and
proposals that are meant to address those longstanding issues.
STRENGTHS
- Large and diverse economy;
- High wealth;
- Stronger liquidity in recent years;
- Significant improvement in budget deficits through revenue surges
and conservative measures to rein in spending; and
- Governance improvement leading to on-time budgets for
the past three years.
CHALLENGES
- Highly volatile revenue structure;
- Governance restrictions (such as supermajority requirement to
raise taxes) that make it difficult for state to respond to revenue volatility;
- Lack of reserves built up to cushion the state's finances from
downturns (although a recent proposal aims to address this); and
- Reliance in past on deficit borrowing and other one-time
solutions to resolve budgetary gaps, which has led to negative audited
fund balances.
RATINGS AFFECTED BY THE UPGRADE
TO Aa3 FROM A1:
-General obligation bonds
TO A1 FROM A2:
-Most state lease appropriation debt (most issued by State Public
Works Board)
TO A2 FROM A3:
-California Judgment Trust Certificates of Participation,
Series 2005
-Taft Public Financing Authority Lease Revenue (Community Correctional
Facility Acquisition Project) Series '97A
-Shafter Joint Powers Financing Authority Lease Revenue (Community
Correctional Facility Acquisition Project) Series '97A
TO A3 FROM Baa1:
- Revenue Bonds (South Central Los Angeles Regional Center Project)
Series 2013
- Revenue Bonds (Harbor Regional Center Project), Series
2009
- Revenue Bonds (Kern Regional Center Project), 2009 Series
A
- Revenue Bonds (Inland Regional Center Project) Series 2007
OUTLOOK
The outlook on the State of California is stable at this time, based
on our expectation that the state's economy and finances will continue
to show growth in the near term as the nation also improves.
WHAT COULD MAKE THE RATING GO UP
- Governance changes that significantly reduce budgetary inflexibility
- Governance changes that require state to build reserves large
enough to cushion against revenue downturns, with a track record
of maintaining the reserves
- Reduced revenue volatility
WHAT COULD MAKE THE RATING GO DOWN
- Prolonged economic weakness or stagnation, causing deterioration
in finances and liquidity
- Dramatic increase in debt and/or a significant increase in long-term
pension liabilities
- Movement away from structurally balanced budgeting, and/or
a renewed reliance on one-time measures to balance budget
-Reduced liquidity, with an inability to meet monthly cash
needs with available resources leading to a return to the issuance of
IOUs or other cash management tools
- Reduced market access
RATING METHODOLOGY
The principal methodology used in this rating was US States Rating Methodology
published in April 2013. An additional methodology used in rating
the lease debt was The Fundamentals of Credit Analysis for Lease-Backed
Municipal Obligations published in December 2011. Please see the
Credit Policy page on www.moodys.com for a copy of these
methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Emily Raimes
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Kenneth B Kurtz
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades State of California to Aa3; outlook stable