The Rating Outlook is Stable.
Fitch also affirms the ratings on outstanding lease appropriation and other bonds related to the state GO as detailed at the end of this release.
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 state spending.
KEY RATING DRIVERS
IMPROVED FISCAL MANAGEMENT: The state has benefitted from institutionalized changes to fiscal management in recent years, which, when combined with the ongoing economic and revenue recovery, have enabled it to materially improve its overall fiscal standing. Progress includes timely, more structurally sound budgets, spending restraint, and continued sizable reductions in budgetary debt.
WEALTHY, DIVERSE ECONOMY: The economy is wealthy and unmatched among U.S. states in its size and diversity. After severe, widespread recessionary conditions, growth has resumed, including in
MODERATE DEBT BURDEN: Tax-supported debt is moderate, but has grown for infrastructure needs and budgetary borrowing. Pension funded ratios have declined and there is a history of inadequate contributions to the teacher system; however, the state has instituted some benefit reforms and the fiscal 2015 enacted budget provides the first installment of a long-term plan to increase funding of the teacher pension system.
CYCLICAL REVENUES AND CASH FLOWS: State finances are subject to periodic, severe budget and cash flow stress due to economic cyclicality, revenue volatility tied to personal income taxes, carried over structural imbalances, a lack of reserves and institutional inflexibility. The state expanded its ability to manage cash flow weakness during the last downturn, and other fiscal management reforms made to date can be expected to make the effects of future downturns more manageable.
TANGIBLE STRUCTURAL PROGRESS: Deep recurring spending cuts in recent adopted budgets and a restrained approach to restoring past cuts have significantly lowered the state's structural imbalance. The state has made significant progress in reducing the burden of budgetary borrowing from the last two fiscal crises; however, its historical difficulty achieving and sustaining budgetary solutions poses an ongoing risk.
INITIATIVES LIMIT FLEXIBILITY: Voter initiatives have reduced the state's discretion to effectively manage budgetary challenges over time. However, more recent initiatives authorizing a simple legislative majority to approve spending and temporarily raising tax revenues have been instrumental to current fiscal progress.
CONTINUED FISCAL DISCIPLINE: The rating is sensitive to the continuation of the state's recent fiscal discipline and its ability and willingness to continue addressing numerous fiscal challenges. Continued progress on reducing budgetary borrowing, maintenance of structural balance and addressing key fiscal risks could result in rating improvement.
Notable fiscal management improvements since the fiscal crisis of 2008 - 2009 have included a voter-approved change that allows simple majority budget approval as well as various cash flow management tools. Successive years of timely budgets that achieved structural gains primarily through deep, recurring spending cuts have also positioned the state to make steady progress repaying past budgetary borrowing under the state's current forecast.
The state's longstanding challenges to achieving and maintaining budgetary gains -- often due to lawsuits, federal objections, or allowing spending to grow at a pace in excess of sustainable revenues -- could continue to weigh on the state's finances.
A proposed constitutional amendment on the ballot this November would strengthen the funding mechanism of the BSA and provide the state with a means to better manage revenue cyclicality. The amendment would require that 1.5% of general fund revenues be set aside in the BSA and would require additional deposits whenever capital gains rise to more than 8% of general fund tax revenues. Half of each year's deposit for the next 15 years would be used for supplemental payments toward budgetary debt or other long-term liabilities. In Fitch's view, passage of the proposed measure could position the state for additional fiscal improvement and could be viewed as a credit positive.
ECONOMIC RECOVERY GAINING MOMENTUM
The state's latest economic outlook, released in
IMPROVED BUDGET OUTLOOK
The state has adopted four consecutive budgets on a timely basis that prioritize shoring up the state's finances, including through prudent control of spending and budgetary debt repayment. Only four years ago, the state faced a cumulative operating gap of
The adopted budget for fiscal 2014 did not require gap-closing measures to achieve balance, although the plan trimmed some spending, funded modest service restorations and included notable structural changes to school funding and to health care delivery in preparation for federal health reform. Revenue performance in fiscal 2014 was strong, outpacing the conservative forecast on which the budget was based by
The enacted budget for fiscal 2015 assumes continued economic recovery and steady revenue gains through fiscal 2015, while emphasizing the uncertainty that is inherent in
DEBT AND PENSIONS
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
Using Fitch's more conservative 7% discount rate assumption, funded ratios for the two systems fall to 78.8% for public employees and 63.5% for teachers. On a combined basis, net tax-supported debt and pension liabilities attributable to the state at 8.3% are above the state median of 6.1%, ranking the state 31st.
The state adopted a broad package of pension reforms in 2012 that affect most state and local systems, including through benefit reductions for new workers and higher contributions for employees. While changes are expected to generate only modest near-term annual savings for the state and for local governments whose pension plans are subject to the reforms, annual savings are expected to grow considerably over time.
Full actuarial contributions to the public employees' system are legally required, but not for the teachers' system, leading to persistent underfunding of the latter. The state addressed teachers system funding with legislation enacted in
RELATED RATING ACTIONS
Fitch also affirms the 'A' rating and Stable Outlook on the following bonds, which are rated on par with the state GO:
--Cal-Mortgage Loan Insurance Division bonds.
State appropriation-supported bonds of the state issued by the following entities are affirmed at 'A-' 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
Appropriation bonds of the state issued by the following entities are affirmed at 'BBB+', two notches below the state's GO rating; the Rating Outlook remains Stable:
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from
--'Tax-Supported Rating Criteria' (
--'U.S. State Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Source: Fitch Ratings
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