Nov 22 () - (The following statement was released by the rating agency)
Nov 22 - California is benefiting from an economic and revenue rebound, combined
with three consecutive balanced budgets. However, continuing this progress will
require the state to resist restoring spending levels and prioritize the payoff
of past borrowing for operations, Fitch Ratings
says. Although California's fiscal situation has improved significantly, we also
believe it remains a long way from fully recovering from the effects of the two
fiscal crises experienced in the past decade.
California's Legislative Analyst's Office (LAO) published its state fiscal
outlook this week, projecting continued budgetary surpluses through fiscal 2019,
a forecast that we consider reasonable. LAO's favorable outlook is the product
of ongoing economic growth, recent temporary tax increases and consistent state
actions to maintain spending austerity at a time of rising revenues.
Notwithstanding recent budgetary discipline, the state historically has had
difficulty restraining spending growth during periods of strong fiscal
performance, setting the stage for more severe fiscal weakness in the inevitable
recession that follows.
The governor has long emphasized the importance of eliminating the budgetary
borrowing, mainly owed to schools, remaining from these fiscal crises. The state
has made material strides to date, lowering the balance to $26.9 billion in
fiscal 2013 from $34.7 billion in fiscal 2011. The state's forecast assumes
budgetary borrowing will fall to $4.7 billion by fiscal 2017.
In our view, California has other budgetary challenges beyond repaying
borrowing. The state has yet to correct the deep underfunding of teacher pension
contributions, which CalSTRS estimated at $4.5 billion as of July 1, 2014. And
annual interest payments to the federal government on the state's unemployment
trust fund deficit, estimated to be $9.7 billion as of Dec. 31, 2013, are
ongoing. The state's October 2013 unemployment insurance fund forecast assumes
benefit payments exceeding employer receipts through 2015, with only slow
progress lowering the deficit in the near term.
The LAO report also notes the risk of another recession during the forecast
period. The volatility of California's tax revenues, particularly capital gains
taxes, has been a key factor in the state's recent fiscal crises. In our view,
temporary tax rates approved by voters last year are likely to increase this
volatility. Institutional changes made since the 2008-2009 recession would make
timelier, more effective responses to future cash and budgetary weakness more
likely, although the state has not yet begun rebuilding its rainy day fund as a
cushion against revenue underperformance. Recent revenue momentum is solid;
year-to-date through October, the Department of Finance reports revenue
collections 1.9% over forecast, with solid personal income tax receipt levels
offsetting weakness in sales and corporation tax receipts.