California bonds receive ‘AA’ rating from Fitch

Top credit rating agency Fitch has assigned California a “AA” rating for its $2.2 billion in general obligation bonds, a reasonably high grade that analysts say considers the state’s diverse economy that supports “strong, albeit cyclical, revenue growth prospects.”

The state’s general obligation (GO) bonds, which are a type of municipal bond, are used to finance or refinance voter-approved projects. Unlike revenue bonds, general obligation bonds pledge that the state will use all resources available to repay bond holders, including tax revenues, according to Investopedia.

Similar to an individual credit score, the better the bond credit rating, the cheaper the borrowing cost, according to the California State Treasurer’s Office.

Fitch’s latest ranking considered $1.4 billion in GO bonds used for various purposes, as well as $800 million various purpose GO refunding bonds. According to analysts, the state has a “moderate level of long-term liabilities” and “strong fiscal management” that allows the state to “withstand economic and revenue cyclicality.”

Analysts predict that just as the state saw strong economic growth following the Great Recession, California will likely return to this trend post-pandemic.

Fitch gave the state’s revenue framework a “AAA” rating – the highest on its grading scale – noting that the state’s tax revenues are “dominated by personal income taxes.”

“Long-term growth prospects for revenues are strong, driven by the state’s robust economic fundamentals,” the report states. “The state retains the independent legal ability to raise taxes, subject to a legislative super-majority voting requirement.”

Analysts gave the state’s long-term liability burden a “AA” rating in its report, noting that while the state is above the nationwide median, the liabilities remain a “moderate burden on the resource base.” The report explains that the state is working to address pension liabilities with benefit reforms and supplemental contributions.

Fitch analysts also gave California’s operating performance a high “AA” ranking, saying that the government’s “strong budget management” during periods of economic expansion and growth after the Great Recession allowed the state to “materially improve its financial position” and “enhance its ability to address future fiscal challenges.”

“The state eliminated budgetary liabilities, built a rainy day fund, enacted on-time, structurally balanced budgets and generally used a prudent approach to managing demands for additional spending,” the report notes. “All of these efforts contribute to greater resilience to cyclical economic changes.”

Fitch analysts reviewed Gov. Gavin Newsom’s $286.4 billion proposed budget for the coming fiscal year, saying they consider it to be “generally prudent and structurally balanced.”

Analysts said the proposed budget shows a “commitment to building reserves” and investing in key policy areas, with funding priorities in education, housinghealth care, climate resiliency and workforce development.

The report does note, however, that the state’s unemployment still remains higher than the national rate, which indicates “continuing labor market challenges.” In December, the state’s monthly unemployment rate was 6.5%, which was above the U.S. median of 3.9%.

Despite the state’s lagging employment recovery, Fitch analysts say the state continues to see strong revenue performance.

“The slower labor market recovery has not translated to weak revenue performance; in contrast, the revenue rebound continues to be quite strong,” the report states.

This article was originally posted on California bonds receive ‘AA’ rating from Fitch

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