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California's $800M Bonds Rated 'A+'; Deficit Still A Concern
S&P NEW YORK Aug. 28, 2006--Standard & Poor's Ratings Services assigned its 'A+' standard long-term rating, and stable outlook, to California's $800 million various-purpose GO bonds and affirmed its 'A+' standard long-term rating and underlying rating (SPUR), with a stable outlook, on the state's GO debt.
The bonds are scheduled to sell on Sept. 7.
The state recorded a small, but positive, GAAP general fund balance as of fiscal year-end 2005, the last audited year. California has a history of uneven financial operations. On a budgetary basis, the state ran large operating deficits from fiscals 2001-2004 and a small surplus in 2005. The deficits were met with an $11.3 billion deficit bond issue and $7.2 billion of accounting restatements during fiscals 2004-2005, attributable, in large part, to windfall tax revenues accrued in previous years. The state estimates a small general fund operating surplus on a budgetary basis of accounting for fiscal 2006, and Gov. Arnold Schwarzenegger is proposing a large operating deficit for fiscal 2007; this, however, includes a number of large onetime expenditures. The governor's proposal would draw down a large fiscal year-end 2006 reserve to a small, but still positive, level at fiscal year-end 2007.
"California's inability to wholly eliminate its structural deficit despite prosperous economic conditions remains a credit concern. Furthermore, there are reasons to believe the current revenue surge could be of a onetime nature," said Standard & Poor's credit analyst David Hitchcock. "The budgeted spend down of much of the state's fund balance in fiscal 2007 constrains the rating, as does the substantial amount of deficit financing bonds remaining because they are almost equal to the estimated fiscal 2006 general fund balance."
The state has a continuing persistent structural deficit, amounting to roughly $3 billion in fiscal 2007, or about 3% of budget, and a $4 billion-$5 billion projected structural deficit in fiscal 2008 without legislative changes. This structural deficit is reduced from much higher levels in previous years, but it continues even during a period of economic strength. State constitutional structural impediments hamper budget consensus and have often led to late budget passage.
The state estimates fiscal 2006 will end with a $9.5 billion budgetary basis balance, or a strong 10.3% of expenditures. The state estimates fiscal 2006 produced a small $19 million estimated budgetary basis operating surplus (not including $525 million of tobacco bond proceeds), an improvement over the original budget. The state budget projects a $7.5 billion surge in combined fiscals 2006-2007 revenues over projections made this past January. The enacted 2007 budget proposal increases fiscal 2007 general fund expenditures by 9.2%, and spends down the budgetary basis fund balance by $7.4 billion, to $2.6 billion, or a relatively small 2.6% of expenditures, at fiscal year-end 2007.
Overall net tax-supported debt levels are rising rapidly and currently stand at $1,497 per capita.
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