California's $400 Million GO Bonds And $1.7 Billion Various Purpose GO Refunding Bonds Rated 'AA-' With A Stable Outlook

NEW YORK (S&P Global Ratings) April 2, 2019--S&P Global Ratings assigned its 
'AA-' long-term rating to the State of California's $400 million general 
obligation (GO) bonds, and $1.7 billion various purpose GO refunding bonds. 

At the same time, S&P Global Ratings affirmed its 'AA-' long-term ratings and 
underlying ratings (SPURs) on California's $73.1 billion of GO bonds 
outstanding, as of Jan. 1, 2019. S&P Global Ratings also affirmed its 'A+' 
long-term ratings and SPURs on the state's $8.9 billion in 
appropriation-backed lease revenue bonds outstanding as of Jan 1. 

In addition, we affirmed the long-term component of the 'AA+/A-1' and 
'AAA/A-1+' 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 (LOC) 
providers. The short-term component of the ratings match the ratings of the 
LOC providers. The outlook on all long-term ratings is stable.

"The stable outlook reflects, in part, the current structural alignment of 
California's fiscal operations, with recurring revenues sufficient to fund the 
state's legally required ongoing expenditure base," said S&P Global Ratings 
credit analyst David Hitchcock. Although California's fiscal position is much 
improved from five and 10 years ago, and the state's new governor has 
prudently proposed using a good portion of revenue growth for continued 
buildup of reserves and one-time expenses, we attribute the state's 
post-recession gains to a combination of cyclically favorable economic 
conditions, the previous governor's emphasis on reserve accumulation, and 
California's current (nonpermanent) tax policy. While we view the governor's 
proposed budget for fiscal 2020 favorably from a credit perspective, it 
remains to be seen whether the legislature will retain these goals in the 
final adopted budget. Recent income tax revenue declines in December and 
January compared with prior-year periods could also see downward revisions in 
forecasted revenue when the governor's May budget revisions are released. If 
structural budget alignment remains a fiscal policy priority when the fiscal 
2020 budget is enacted, we could potentially revise the outlook to positive. 

"The main downside risk we see to our rating on California through our 
two-year outlook horizon is the potential for unanticipated economic and 
fiscal stress coinciding with an adopted budget that expands ongoing 
expenditures to the extent that the money to pay for them must come from 
cyclical or one-time revenue sources," Mr. Hitchcock added. This could occur 
if structural balance were jeopardized by a substantial fall in capital gains 
as the result of a sustained decline in equity markets, general economic 
weakening, or the withdrawal of federal fiscal aid. Both the severity of such 
a scenario and lawmakers' response to it (such as timely versus delayed or 
structural versus one-time corrective measures) could affect our view of the 
state's credit quality, particularly in light of constitutional requirements 
for a legislative supermajority in order to raise tax rates.
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