WASHINGTON (MNI) – The following is the text of a statement by
Standard & Poor’s Tuesday raising its outlook on California to positive
from stable:
Standard & Poor’s Ratings Services revised its outlook on all
long-term and underlying ratings for California to positive from stable.
In addition, we affirmed our ‘A-‘ long-term ratings and underlying
ratings (SPURs) on California’s $73.37 billion of general obligation
(GO) debt. Simultaneously, we affirmed our ‘A-‘ and ‘BBB+’ long-term
ratings and SPURs on the state’s $1.9 billion of Proposition 1A and
$10.53 billion of appropriation-backed debt. We also affirmed our
‘AAA/A-1+’, ‘AAA/A-1′, and ‘AAA/A-2′ ratings on some of the state’s GO
variable-rate demand bonds. The long-term component of the ratings is
based jointly (assuming low correlation) on that of the obligor,
California, and the various letter of credit providers. The short-term
component of the ratings is based solely on the ratings on the letter of
credit providers.
“We are revising the outlook because, barring any other credit
deterioration, with think the state is poised for credit improvement —
and potentially a higher rating — pending its ability to better align
its cash performance and budget assumptions,” said Standard & Poor’s
credit analyst Gabriel Petek.
“We believe that by downsizing its spending base, the state has
corrected a significant portion of its budget imbalance. Improvement in
the state’s underlying fiscal position now largely hinges on whether the
state can realize the cuts as reduced cash outflows and on whether its
tax collections move closer to what is assumed in the state’s budget.
The majority vote budget process — as demonstrated for fiscal 2012 —
also helps reduce the state’s risk of very late budget enactment in our
view. Late budgets had previously been a recurring source of liquidity
stress because, without a budget, the state is generally precluded from
pursuing its regular annual cash flow borrowing,” added Mr. Petek.
Our ‘A-‘ rating on the state’s GO debt is low for a U.S. state and
reflects our view that California is prone to encountering liquidity
shortfalls. At this point, a higher rating is therefore contingent on
the state’s ability to better align its cash performance and budget
assumptions. We think the groundwork is in place for this, but
improvement to state liquidity has yet to fully materialize. The timely
enactment of a fiscal 2013 budget with sufficiently credible deficit
solutions — such as definitive trigger cuts not subject to political
negotiation after the state’s November election — to finance its annual
cash flow borrowing would also help support a higher rating.
Despite having made substantive fiscal adjustments,
weaker-than-budgeted cash flow trends led the state controller to
declare recently that, without corrective action, the state would
temporarily breach its $2.5 billion minimum daily cash cushion. The
state controller also stated that he expects the shortfall to persist
for approximately seven weeks, through mid-April, and that without a fix
the state’s cash would dip into negative territory as of March 1.
The current cash deficiency stems from a combination of
underperforming tax revenues and unrealized spending reductions.
Compared with state budget assumptions, these had reduced state cash
resources by $5.2 billion through January.
According to the state controller, the situation necessitates new
midyear cash solutions of $3.3 billion to help the state fulfill the
demands on its liquidity. The controller, working with the department of
finance and the treasurer’s office, developed a cash management plan
that the controller expects will restore the state’s minimum daily cash
balance of $2.5 billion.
** Market News International Washington Bureau: 202-371-2121 **
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