Bangkok--26 Apr--Standard & Poor's
Standard & Poor's Ratings Services affirmed its 'A-' long-term and underlying ratings (SPURs) on California's general obligation (GO) debt. We simultaneously affirmed our 'A-' rating on the state's variable-rate demand bonds. The outlook on all ratings is negative.
The state's ratings reflect our view of:
- The state's economic depth and diversity, which boasts a well-educated workforce that attracts and generates firms in progressive and innovative sectors, helping position California as a leading venture capital recipient state.
- Deep structural budget imbalance predicated on a volatile revenue base, which presents recurring stress to state liquidity;
- An array of legal requirements and mandates that complicate governance and fiscal management; and
- Large off-balance-sheet liabilities and legal claims on future general fund resources, further diminishing fiscal flexibility.
We believe the state's near term credit performance is likely to be described by the following characteristics:
- Strong cash management practices, which we view as a function of the administrative ability and willingness of state authorities to maintain adequate liquidity to meet its priority payment obligations -- including debt service;
- Continued gradual improvement in the state's economy and revenues, thus potentially assisting the state's cash position; and
- A fractured budget negotiation process that currently lacks a clear path to balance or political resolution;
The state's general fund serves as the source of repayment for all of the GO bonds, to which the state has pledged its full faith and credit.
Pursuant to the American Recovery and Reinvestment Act (ARRA), a portion of the state's bonds were issued as federal taxable Build America Bonds (BABs) and qualify for a cash subsidy from the U.S. Treasury equivalent to 35% of the annual interest payments on the bonds.
State funding to the K through 12 public school system and public institutions of higher education are the state's only obligations that, according to the state's constitution, have a higher priority than GO debt service payments. Of the state's debt service payments, the state's lease- and appropriation-backed debt is among its other priority payments that fall behind state GO bond and Proposition 1A bond payments, the latter of which fall behind the GO bonds.
"In our view, the state's priority of payment structure demonstrates that, despite a visible budget crisis, the state's ability to fund its debt obligations remains strong," said Standard & Poor's credit analyst Gabriel Petek. "However, we continue to monitor the state's liquidity position in light of its budget situation. Cash flow management is an integral part of the state's credit profile -- and an area we believe could encounter stress in the absence of a budget agreement," added Mr. Petek.
The outlook on California's rating remains negative, mostly because of our view of the risk to the state's cash position in the coming months if state lawmakers are unable to reach the level of political consensus necessary to resolve the remaining projected budget deficit. Although the $11.2 billion in solutions enacted thus far represents what we consider to be good progress, a protracted stalemate in agreeing on the remaining gap, which is required by the state's constitution, could expose the state's liquidity to significant risk of being insufficient to fund all of the state's operations. We believe that this, in turn, might lead to aggressive cash management measures by the state controller. In our view, any downward movement in the state's rating, should it occur, is likely to be related to a problem with its liquidity. On the other hand, if the state could enact a budget in a reasonable timeframe allowing for issuance of its RANs prior to the emergence of a cash crisis, the outlook could return to stable.
RELATED CRITERIA AND RESEARCH
USPF Criteria: GO Debt, Oct. 12, 2006
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
Media Contact:
Edward Sweeney, New York (1) 212-438-6634,
[email protected]
Analyst Contacts:
Gabriel Petek, CFA, San Francisco (1) 415-371-5042
David G Hitchcock, New York (1) 212-438-2022