California's prisons plan no worry for credit rating agencies

SAN FRANCISCO Thu Aug 29, 2013 3:09pm EDT

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SAN FRANCISCO Aug 29 (Reuters) - California Governor Jerry Brown's plan to expand the state's prison capacity, heavily criticized by some lawmakers, is not a major concern for credit rating agencies despite its cost of more than $1 billion over three years.

Under pressure from federal courts to free up space in the state's packed prisons, Brown earlier this week proposed housing inmates in private facilities, county jails and prisons in other states.

The Democratic governor would use $315 million from the state's contingency fund this fiscal year for his plan and $415 million from the state's general fund in each of the following two years.

An alternative to comply with a court order would be to free some 10,000 inmates - an option the state's leaders consider politically radioactive. The Assembly's Democratic speaker and the legislature's top Republicans support Brown's plan, but it is running into opposition from Democrats in the state Senate.

Credit rating agencies are gaining confidence in how California manages its finances and have been waiting for it to tap reserves to tackle its prisons problems, which have festered for years.

"The state has left itself a credible cushion to absorb the unexpected," Fitch Ratings analyst Douglas Offerman said. "In this case, California has given itself the flexibility to address the challenge."

Fitch earlier this month raised its rating on California's general obligation debt one notch to 'A' despite the risk of court-related costs like those tied to prison overcrowding.

As the state's revenue picked up thanks to tax hikes approved by voters last year and a stronger economy, Brown in June signed a budget with a surplus that ended a decade of deficits.

Standard & Poor's analyst Gabriel Petek said California can now afford the immediate cost of Brown's prisons plan. "I don't think it rises to the level of a material credit pressure at this point," he said.

But proposed spending in the plan's second and third years could compete for funds Brown could use to pay down internal loans used in the past to help close budget gaps, Petek said.

S&P this month affirmed its 'A' rating on California's general obligation debt, citing the state's "aligning recurring revenues and expenses while paying down budgetary debts." S&P raised its rating on California from 'A-minus' in January.

Offerman sees a potential risk that the cost of Brown's plan could exceed expectations, but analyst Ken Kurtz of Moody's Investors Service said the proposed spending appears manageable.

The plan is not an issue for California's credit rating, Kurtz added, noting Moody's recently affirmed its 'A1' rating on the state's general obligation bonds.

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