Fitch Ratings assigns an 'A' rating to $800 million
various purpose general obligation (GO) bonds for bids on March 1.
Fitch also affirms the 'A' rating on approximately $36.4 billion
outstanding GO bonds, as well as the 'A' rating on $1.3 billion
veterans GO bonds and the 'A+' rating on $10.19 billion GO economic
recovery bonds.
The underlying strength and growth of the California economy and strong revenue recovery from the steep declines experienced earlier in the decade provide the potential underpinnings for full financial recovery and credit improvement. Revenue estimates have been raised, primarily due to strength in personal and corporate income taxes, leading to sizable year-end balance estimates. The structural budget imbalance continues to slowly shrink. However, with pent-up demand, spending growth in the proposed fiscal 2007 budget exceeds projected revenue growth and substantially absorbs the surplus. While revenue estimates appear conservative the reduced fund balance cushion would leave the state vulnerable to unforeseen events, such as potential capital gains and real estate volatility. Debt ratios are moderate providing capacity as the state considers funding large capital needs.
California's broad economy is now experiencing moderate growth in all regions, including northern California, which experienced the greatest decline during the recession. Employment growth about equaled the U.S. in 2004 at about 1%, and December 2005 employment grew 1.6% over the same month the previous year compared with the U.S. growth of 1.4%. Notably, construction employment led all sectors at just under an 8% increase. State personal income grew at 6.6% in 2004 and increased 6.0% in the third quarter of 2005 compared to 5.6% growth for the U.S. The budget reasonably projects slight slowing in 2006, with employment and personal income increasing 1.3% and 5.8%, respectively. Residential real estate is now cooling, with housing sales and permits down in the latter half of 2005 and the growth in home prices decelerating. The budget assumes a moderate correction; a steep decline would have a broader economic and revenue impact.
Major tax revenues dropped $13 billion in fiscal 2002, primarily from reduced personal income taxes from capital gains and stock option losses. Spending was not correspondingly reduced, leading to deficits and a cash flow crisis relieved through one-time measures, internal and external borrowing, and, ultimately, the issuance of deficit bonds. Improvement has occurred, primarily through annual revenue growth of about 7% in each of the last two fiscal years including the current one. The recently proposed 2007 budget included a $5.5 billion upward revenue revision covering the two fiscal years, compared to those estimates contained in the adopted fiscal 2006 budget. The increases reflect higher personal and corporate income taxes. Capital gains and stock options, which plummeted from nearly 25% of general fund revenues prior to the downturn to 7%, are estimated to have climbed to approximately 13% of general fund revenues in fiscal 2006. Gains from real estate transactions are estimated to constitute a significant component.
The 2007 proposed budget reasonably projects revenues to increase 4.4% to $91.5 billion; however, spending grows by 8.4% to $97.9 billion resulting in a $6.4 billion operating loss that reduces the fund balance to $674 million. The $6.4 billion operating deficit compares to $7.5 billion projected at the time the fiscal 2006 budget was adopted and reduces to $4.7 billion if prepayments of loans and early payment of the deficit bonds and other obligations that are included in the budget proposal are excluded. Spending growth is fueled by education, increasing by approximately 10.5%, while transportation and Medicaid also receive significant increases. Major taxes increase 5.7% compared to 6.2% estimated in the current year.
Debt levels are moderate at 4.4% of personal income. Amortization is below average, with 39% maturing over 10 years. The governor's proposed strategic growth plan would address pent-up transportation, K-12 and higher education, and other infrastructure needs and includes $68 billion in new GO bond authorizations in addition to existing authorizations. Net debt would approximately double over the 10-year time period, factoring in gradual issuance of both the existing and proposed authorizations, and the scheduled amortization of existing debt. However, with continued population and personal income base growth, and assuming no further authorizations, ratios would remain below the high range.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
The underlying strength and growth of the California economy and strong revenue recovery from the steep declines experienced earlier in the decade provide the potential underpinnings for full financial recovery and credit improvement. Revenue estimates have been raised, primarily due to strength in personal and corporate income taxes, leading to sizable year-end balance estimates. The structural budget imbalance continues to slowly shrink. However, with pent-up demand, spending growth in the proposed fiscal 2007 budget exceeds projected revenue growth and substantially absorbs the surplus. While revenue estimates appear conservative the reduced fund balance cushion would leave the state vulnerable to unforeseen events, such as potential capital gains and real estate volatility. Debt ratios are moderate providing capacity as the state considers funding large capital needs.
California's broad economy is now experiencing moderate growth in all regions, including northern California, which experienced the greatest decline during the recession. Employment growth about equaled the U.S. in 2004 at about 1%, and December 2005 employment grew 1.6% over the same month the previous year compared with the U.S. growth of 1.4%. Notably, construction employment led all sectors at just under an 8% increase. State personal income grew at 6.6% in 2004 and increased 6.0% in the third quarter of 2005 compared to 5.6% growth for the U.S. The budget reasonably projects slight slowing in 2006, with employment and personal income increasing 1.3% and 5.8%, respectively. Residential real estate is now cooling, with housing sales and permits down in the latter half of 2005 and the growth in home prices decelerating. The budget assumes a moderate correction; a steep decline would have a broader economic and revenue impact.
Major tax revenues dropped $13 billion in fiscal 2002, primarily from reduced personal income taxes from capital gains and stock option losses. Spending was not correspondingly reduced, leading to deficits and a cash flow crisis relieved through one-time measures, internal and external borrowing, and, ultimately, the issuance of deficit bonds. Improvement has occurred, primarily through annual revenue growth of about 7% in each of the last two fiscal years including the current one. The recently proposed 2007 budget included a $5.5 billion upward revenue revision covering the two fiscal years, compared to those estimates contained in the adopted fiscal 2006 budget. The increases reflect higher personal and corporate income taxes. Capital gains and stock options, which plummeted from nearly 25% of general fund revenues prior to the downturn to 7%, are estimated to have climbed to approximately 13% of general fund revenues in fiscal 2006. Gains from real estate transactions are estimated to constitute a significant component.
The 2007 proposed budget reasonably projects revenues to increase 4.4% to $91.5 billion; however, spending grows by 8.4% to $97.9 billion resulting in a $6.4 billion operating loss that reduces the fund balance to $674 million. The $6.4 billion operating deficit compares to $7.5 billion projected at the time the fiscal 2006 budget was adopted and reduces to $4.7 billion if prepayments of loans and early payment of the deficit bonds and other obligations that are included in the budget proposal are excluded. Spending growth is fueled by education, increasing by approximately 10.5%, while transportation and Medicaid also receive significant increases. Major taxes increase 5.7% compared to 6.2% estimated in the current year.
Debt levels are moderate at 4.4% of personal income. Amortization is below average, with 39% maturing over 10 years. The governor's proposed strategic growth plan would address pent-up transportation, K-12 and higher education, and other infrastructure needs and includes $68 billion in new GO bond authorizations in addition to existing authorizations. Net debt would approximately double over the 10-year time period, factoring in gradual issuance of both the existing and proposed authorizations, and the scheduled amortization of existing debt. However, with continued population and personal income base growth, and assuming no further authorizations, ratios would remain below the high range.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.