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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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400.09 |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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Fitch Affirms California's GO Rating at 'BBB'; Outlook Stable |
February 3, 2010
Fitch Ratings-New York-03 February 2010: Fitch Ratings takes the following action on the State of California (the state) as part of its continuous surveillance effort:
--$65.4 billion State of California general obligation (GO) and GO veterans bonds, affirmed at 'BBB';
--$1.9 billion in California Statewide Communities Development Authority (Prop. 1A receivables program), affirmed at 'BBB';
--$10.8 billion in appropriation and special obligation debt linked to the state's general credit, affirmed at 'BBB-' (see detail at end of this release);
--$8.8 billion State of California 2009-10 revenue anticipation notes (RANs), series A-1 and A-2, affirmed at 'F2'.
The RANs rating does not carry an outlook; the Rating Outlook on the long-term ratings is Stable.
RATING RATIONALE:
--A large and persistent structural imbalance over the last decade combined with pronounced revenue cyclicality periodically leads to acute budget crises. State revenues are dominated by volatile personal income taxes and the sales tax, both of which are experiencing severe recession-related declines.
--Institutional weaknesses, including inflexibility imposed by voter initiatives and a partisan policy-making environment, have repeatedly delayed action on addressing fiscal challenges, resulted in ineffective budgetary solutions, and impaired future-year budget making.
--Expenditure pressures are significant, including for education, corrections and infrastructure, and driven in part by voter-approved measures and court mandates.
--The state's cash flow continues to experience severe stress, requiring periodic emergency measures by the controller, including payment delays and issuing IOUs.
--The economy is broad, diverse and wealthy, despite currently suffering through a very severe economic contraction led by the housing market downturn.
--Debt levels are currently manageable, but have grown rapidly as longstanding infrastructure needs are addressed; a significant portion of debt outstanding was used to cover prior budget gaps.
KEY RATING DRIVERS:
--Ability to manage continued budgetary and cash flow risks.
--Economic and revenue performance.
SECURITY:
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; such funds for education represent approximately half of state spending.
CREDIT SUMMARY:
The state's 'BBB' rating is based on the magnitude of its fiscal challenges and severely limited flexibility in the context of already deep long-term structural deficits and institutional constraints to effective budget-making.
Although the precipitous revenue declines of the last two years appear to be easing, failure of previous budget solutions and revenue underperformance early in the fiscal year to date have opened a $6.6 billion gap in fiscal year (FY) 2009-10, which ends June 30, reaching $19.9 billion through FY 2010-11, the budget year. Moreover, although forecast cash deficits in March and April of this year appear manageable, cash flows in the next budget year present a near-term challenge in the absence of timely legislative action.
The Stable Rating Outlook reflects that the current long-term rating, well below that of other states, incorporates the extensive financial pressures confronting the state as it seeks solutions for balance. Fitch's view is that budgetary and cash pressures will continue through fiscal 2010-11 and beyond, even as the state's range of options to address those pressures remains limited. The governor's proposed budget, released last month, relies on $8.5 billion in spending cuts, $6.9 billion in extraordinary federal assistance, and $4.5 billion in fund shifts and other measures to close the budget gap and alleviate cash flow strain. In Fitch's view, the prospect of achieving this level of extraordinary federal aid is remote, thus raising the likelihood the state will have to rely on solutions within its control. However, enacted cuts to date already have been severe or subject to court action, and additional recourse to broad tax revenue solutions continues to be unlikely. These factors and the state's history of contentious and prolonged budget stalemate make quick achievement of sustainable solutions unlikely.
The state's revenue forecast, released with the governor's budget, incorporates the underperformance of revenues late in FY 2008-09 and into the first half of FY 2009-10. The governor's budget lowers forecast revenues $4.7 billion in the three fiscal years ending June 30, 2011, including $1.3 billion from FY 2008-09 and $1.5 billion from FY 2009-10. The declines reflect actual and forecast economic weakness and the recognition that $1 billion expected from the partial sale of the State Compensation Insurance Fund (SCIF) in FY 2009-10 is now unlikely to be achieved. After declining 19.3% in FY 2008-09 from FY 2007-08, to $82.8 billion, the state anticipates general fund revenues and transfers rising 6.4% in FY 2009-10, to $88.1 billion, partly due to temporary personal income and sales tax rate increases enacted last year. FY 2010-11 revenues and transfers rise 1.4%, to $89.3 billion, with the return of economic growth. The controller reports that December 2009 revenues were 5.7%, or $481 million, over revised enacted forecast levels, led by personal income tax (PIT) gains.
Much of the budget challenge now faced by the state is linked to its repeated inability to achieve and sustain the savings sought from enacted solutions, including one-shot revenues. The FY 2009-10 budget revision, enacted in July 2009, closed a forecast $24.2 billion gap through the end of the fiscal year. The state now considers $7.2 billion of these solutions to be unachievable, either due to litigation or erosion of assumptions. These include the $1 billion SCIF sale, $1.7 billion in borrowing from redevelopment agencies and the use of $958 million in transportation spillover funds for general fund needs, all of which are subject to litigation. Measures now contemplated to replace previously failed solutions may likewise prove unachievable, underscoring the limited flexibility the state now has given the extent of actions taken to date.
The governor's budget anticipates that FY 2009-10 cash resources will be exhausted during a three-week period in late March and April absent corrective measures. The state controller estimates a need for $2.7 billion in cash actions through this period; the receipt of PIT collections after the April 15 filing date would replenish general fund cash. Although baseline cash assumptions prior to legislative action have narrowed the margin of coverage on $8.8 billion in outstanding FY 2009-10 RANs, Fitch anticipates adequate coverage at maturity, with $2.825 billion due May 25 and $5.975 billion due June 23. Projected unused borrowable funds after RAN repayment are now forecast at $7.4 billion, down from the $10.4 billion anticipated upon issuance; together with RAN proceeds, unused borrowables provide 1.8 times (x) coverage for the maturing RANs. Unused borrowable funds at year-end after repayment equal approximately 8.3% of cash flow, down from 11.5% at issuance, a still adequate indication of how much receipts could fall short and still provide 1x coverage.
A greater concern is the state's projected cash resources in the coming fiscal year; the controller estimates available cash would be exhausted by the end of July 2010, the first month of FY 2010-11, absent broad corrective budget and cash flow actions. Last year, the controller implemented several strategies, including payment deferrals and IOUs, to address at least temporarily the state's cash flow strain in the same period while ensuring continuation of priority payments, and has expressed his commitment to take such action again as necessary. Priority payments include debt service.
The state's economy continues to face severe stress despite gradual easing of job losses in recent months. December 2009 employment was down 3.9% from December 2008, compared to 3% nationwide. Unemployment remains persistently high, most recently at 12.4% in December 2009, vs. 10% nationwide. Job losses continue to be widespread both geographically and across sectors, with key construction, manufacturing, and professional and business services sectors particularly hard-hit. Personal income fell 3% in California in the third quarter of 2009 compared to a 3% decline nationwide. The state's economic forecast released with the governor's budget anticipates gradual improvement in 2010, with rising personal income but continued job market weakness.
The state has a moderate but rapidly rising debt burden, with net tax-supported debt of approximately $85.1 billion as of Jan. 1, 2010, equal to 5.3% of 2008 personal income. The state's debt level will continue to rise with issuance for capital under recently authorized GO bond measures. A large proportion of outstanding debt, notably economic recovery and tobacco settlement bonds, was issued to address operating gaps over the last decade.
As noted above, the following appropriation bonds linked to the state's GO rating are affirmed by Fitch at 'BBB-', with a Stable Outlook:
--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.
Applicable criteria available on Fitch's website at 'www.fitchratings.com' include:
--'Tax-Supported Rating Criteria' (Dec. 21, 2009);
--'U.S. State Government Tax-Supported Rating Criteria' (Dec. 28, 2009);
--'Rating Municipal Short-Term Debt' (Oct. 18, 2007).
Contact: Douglas Offerman +1-212-908-0889, Laura Porter +1-212-908-0575 or Richard Raphael +1-212-908-0506, New York.
Media Relations: Cindy Stoller, New York, Tel: +1 212 908 0526, Email: cindy.stoller@fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
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