Fitch Rates California's $4B RANs 'F1'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'F1' rating to the State of California's $4 billion 2008-09 revenue anticipation notes (RANs), series A, expected the week of Oct. 13 via negotiation. The notes will be fixed rate and noncallable; scheduled maturity is expected no earlier than May 20, and no later than June 30, 2009. The notes will be secured by unapplied moneys in the general fund - including transfers and internal borrowing as permitted by law and subject to prior use for schools and higher education, debt service on general obligation bonds and commercial paper, and reimbursement of advances to the general fund from the special funds as required by law. In addition, the notes carry a back-up pledge of the state to issue revenue anticipation warrants (RAWs) if necessary. The notes are not general obligations of the state.

The 'F1' rating on the fiscal year (FY) 2008-09 RANs reflects adequate coverage of the notes, including borrowable funds. Offsetting factors are a weakening economy and an eroding revenue outlook. The state's history of revenue volatility, particularly in personal income taxes, and the uncertain impact of recent economic shocks present greater risks to cash flow outlook than in recent years. The state's long-term general obligation bond rating is 'A+', Rating Watch Negative.

The state intends to issue a total of $7 billion in RANs for cash flow purposes during the 2008-09 fiscal year, which began on July 1. Upon full issuance, the notes would represent a moderate 6.8% of currently estimated receipts. Projected unused borrowable funds after note repayment are $10.9 billion, and together with note proceeds provide 2.6 times (x) coverage for the maturing notes. Unused borrowable funds at year-end equal approximately 10.6% of cash flow, an indication of the safety margin by which receipts could fall short and still provide 1x coverage. However, these ratios are based primarily on revenue estimates from May 2008, since which time economic and revenue conditions have worsened. The state has provided an alternative scenario incorporating some of this risk, lowering the cushion to 6.1% of cash flow and 1.9x coverage. Last year's cash flow borrowing was also $7 billion and at the time of issuance the state projected unused borrowables coverage of 2.7x.

The state's budgetary and cash flow situation has declined recently; FY 2007-08 ended without a cash balance and with an outstanding temporary loan of $1.45 billion from the special fund for economic uncertainties (SFEU). During the year, significant action was necessary to address cash flow and budget concerns, including deferring disbursements and borrowing the remaining $3.3 billion in economic recovery bond authorization.

The FY 2008-09 budget, signed 85 days after the start of the FY, foresees a 0.7% decline of receipts from prior year actuals, to $102.7 billion. Personal income and sales tax collections drop 0.1% and 0.6%, respectively. Disbursements decline 0.4%, to $106.9 billion. This leaves the state general fund and SFEU without a cash balance at FY end, and with $4 billion in outstanding loans from internal sources. The budget agreement incorporated wide-ranging measures to augment cash flow flexibility, including shifting the timing of up to $3.6 billion in disbursements within the year to reduce the anticipated cash low point, as well as administrative and statutory measures to increase borrowable funds about $4.4 billion.

Despite actions taken to date, significant uncertainties cloud the state's economic and fiscal outlook. Actual receipts during September fell 5.1%, or $540 million below May forecast figures, with significant shortfalls in personal income, sales and corporation taxes. In response, the state is incorporating a cash flow stress scenario with almost $4.6 billion in additional risks. These are primarily in receipts, but include contingencies for negative litigation outcomes, notably $300 million for correction-related capital needs. Under this scenario, borrowable resources still provide a $6.2 billion cushion after payment of the notes. Fitch believes additional forecast revisions will be necessary.

California's economy is slumping, with an unprecedented decline in residential real estate leading to broad weakness across sectors and regions. August 2008 employment was down 0.5% from the prior August, compared to a 0.3% decline nationwide; unemployment in California rose to 7.7%, versus 6.1% nationally. Personal income growth has weakened, with second-quarter 2008 rising 4.3% year-over-year, compared to 5.2% for the U.S. On a budgetary basis, the personal income tax is projected to increase 2.5% during FY 2008-09, and the sales tax is projected to increase 1.1%.

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