NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A-' rating to the following lease revenue bonds of the California State Public Works Board (SPWB):
--$141 million (Department of Corrections and Rehabilitation) 2013 series F (various correctional facilities);
--$169 million (Department of Corrections and Rehabilitation) 2013 series G (Wasco State Prison: various buildings);
--$171 million Trustees of the California State University) 2013 series H (various California State University projects).
The bonds will be sold via negotiated sale on or about October 2.
In addition, Fitch affirms the following :
--Approximately $9.5 billion in outstanding state appropriation bonds at 'A-'.
The Rating Outlook is Stable.
Lease rental payments made by state agencies to the SPWB from first lawfully available funds for use and occupancy of facilities, subject to annual state legislative appropriation.
KEY RATING DRIVERS
RATING LINKED TO STATE: The 'A-' rating on lease revenue bonds, one notch below the state of California's general obligation (GO) rating, reflects the appropriation required for debt service payment and solid program mechanics.
RECENT STATE UPGRADE BASED ON FISCAL MANAGEMENT IMPROVEMENT:
Institutionalized changes to fiscal management in recent years, combined with the ongoing economic and revenue recovery have enabled the state to materially improve its overall fiscal standing. Notable progress includes timely, more structurally sound budgets, spending restraint, and sizable reductions in budgetary debt.
CALIFORNIA'S GENERAL CREDIT QUALITY: The rating incorporates the size and breadth of the state's economy and tax base and the strengths inherent in a state's broad powers. Despite Fitch's expectation that the state's fiscal situation will continue to improve, California's credit standing is likely to remain lower than that of most states for the foreseeable future given the magnitude of the state's accumulated budgetary and financial challenges.
RATING LINKED TO STATE CREDIT QUALITY: The rating is sensitive to changes in the state's GO bond rating, to which this rating is linked.
The SPWB is California's primary means of financing state facilities, with bonds benefiting from a strong lease structure and the essential nature of leased assets. Debt service is paid from lease rental payments made pursuant to specific project leases. Lease rental payments are appropriated annually by the legislature, with the lessee agency required to use the first funds lawfully available to it for lease payments on SPWB debt. Abatement is possible, but projects require rental interruption insurance.
Each series in the current sale is being issued under separate series indentures either pursuant to or incorporated into the master indenture, and thus they benefit from parity access to the SPWB's $164.5 million master indenture reserve. Prior to this sale, the master indenture reserve backs about $10.6 billion in outstanding SPWB lease bonds issued under the master indenture and under incorporated indentures.
The SPWB's bond rating is linked to the state's GO bond rating, at 'A', Outlook Stable. Fitch upgraded the state's rating in August 2013, based on the institutional improvements made by the state in recent years, its disciplined approach to achieving and maintaining structural balance in recent budgets, and the consequent fiscal progress made to date by the state as it recovers from the severe budgetary and cash flow crisis of 2008-2009. Fitch believes that these gains provide the state with a greater capacity to address future fiscal and budgetary cyclicality. However, California's credit standing is likely to remain lower than that of most states for the foreseeable future given the magnitude of the state's accumulated budgetary and financial challenges.
Notable fiscal management improvements since the fiscal crisis of 2008-2009 have included a voter-approved change that allows simple majority budget approval as well as various cash flow management tools. Successive years of timely budgets that achieved structural gains primarily through deep, recurring spending cuts have also positioned the state to make steady progress repaying past budgetary borrowing under the state's current forecast.
The temporarily higher personal income tax (PIT) and sales tax rate changes approved by voters in November 2012, while exposing the state to sharper revenue volatility, provide it with a margin of cash and revenue flexibility to sustain recent progress and repay budgetary borrowing assuming the state continues to exercise spending restraint. The state forecasts reducing budgetary borrowing to $4.7 billion by fiscal 2017, as the temporary rates begin to expire, down from $26.9 billion as of June 30, 2013.
Although California's fiscal situation has improved significantly, Fitch views the state as being a long way from full recovery from the effects of two fiscal crises over little more than a decade. 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 risk.
Additionally, the state's longstanding challenges to achieving and maintaining budgetary gains - often due to lawsuits, federal objections, or allowing spending to grow at a pace in excess of sustainable revenues - could continue to weigh on the state's finances. California has limited sources of flexibility with which to confront the inevitable future downturn, and the budget stabilization account, the state's rainy day fund, remains empty. However, key credit strengths include its massive, diverse economy and tax base and the strengths inherent in a state's broad powers.
For further information on California's GO rating, please see Fitch's rating action commentary dated Aug. 5, 2013, 'Fitch Upgrades California GOs to 'A'; Outlook Revised to Stable', available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria