Fitch upgrades California bonds from ‘A-‘ to ‘A’

Fitch Ratings today announced it has upgraded the rating on $72 billion in California general-obligation bonds from “A-” to “A” and upgraded the rating outlook from “stable” to “positive” – another sign of Wall Street’s resurgent confidence in the Golden State.

Fitch’s move, the first upgrade the state has seen in three years, follows similar action from Standard & Poor’s in January.

Gov. Jerry Brown tweeted Tuesday afternoon that it’s “a further move toward greater fiscal stability;” spokesman Evan Westrup said it’s a sign that Brown’s approach is working, and underscores the need for continued budgetary discipline.

“The upgrade is based on institutionalized changes to fiscal management in recent years, which combined with the ongoing economic and revenue recovery have enabled the state to materially improve its overall fiscal standing,” according to Fitch’s statement. “Notable progress includes timely, more structurally sound budgets, spending restraint, and sizable reductions in budgetary debt.”

Fitch said California’s economy is “wealthy and unmatched among U.S. states in its size and diversity. After severe, widespread recessionary conditions, growth has resumed, including in California’s housing market.” Meanwhile, “tax-supported debt is moderate, although it has grown in the last decade for infrastructure needs and budgetary borrowing. Pension funded ratios have declined and contributions to the teacher system remain inadequate, but the state has instituted some benefit reforms.”

It ain’t all roses. Fitch reports California’s finances “are subject to periodic, severe budget and cash flow stress due to economic cyclicality, revenue volatility tied to personal income taxes, carried over structural imbalances, a lack of reserves and institutional inflexibility.” But the state “expanded its ability to manage cash flow weakness during the last downturn, and other progress made to date can be expected to make the effects of future downturns more manageable,” the rating agency found.

“Deep recurring spending cuts in recent adopted budgets and a restrained approach to restoring past cuts have significantly lowered the state’s structural imbalance,” the statement says. “Nevertheless, the state carries a heavy burden of budgetary borrowing from the last two fiscal crises and its historical difficulty achieving and sustaining budgetary solutions poses an ongoing risk.”

Fitch also cautioned that voter initiatives “have reduced the state’s discretion to effectively manage budgetary challenges over time. However, more recent initiatives authorizing a simple legislative majority to approve spending and temporarily raising tax revenues have been instrumental to current fiscal progress.”

“Although California’s fiscal situation has improved significantly, Fitch views the state as being a long way from a full recovery from the effects of two fiscal crises over a little more than a decade,” the rating agency found. “Budgetary borrowing in the form of deferrals, internal loans and deficit bonds will remain a drag on current resources for several years even under optimistic scenarios. Despite the institutional reforms of recent years, unmet needs to address unemployment borrowing, underfunding of teacher pensions, and prisons represent material risks.”

Josh Richman

Josh Richman covers state and national politics for the Bay Area News Group. A New York City native, he earned a bachelor’s degree in journalism from the University of Missouri and reported for the Express-Times of Easton, Pa. for five years before coming to the Oakland Tribune and ANG Newspapers in 1997. He is a frequent guest on KQED Channel 9’s “This Week in Northern California;” a proud father; an Eagle Scout; a somewhat skilled player of low-stakes poker; a rather good cook; a firm believer in the use of semicolons; and an unabashed political junkie who will never, EVER seek elected office.