Moody’s affirms California and its negative outlook ahead of Public Works Board deal

Moody’s Investors Service retained its negative outlook on California as the state plans to sell $371 million of Public Works Board lease revenue bonds competitively on Oct. 25.

The rating agency assigned a negative outlook to the state’s bonds in May, but affirmed the state’s Aa2 general obligation bond rating, amid revenue uncertainty as the state and federal government delayed income tax filings to October after the state was hit by a series of massive rainstorms causing flooding earlier in the year.

The bonds issued through the California State Public Works Board of $306 million in tax exempt lease revenue bonds for capital projects and $55 million in taxable lease revenue bonds for the Judicial Council of California were assigned an Aa3 rating, a notch below the GO bonds.

Flooded strawberry fields in Monterey County, in March. Winter storm driven disaster declarations led to delayed California income tax deadlines, adding uncertainty for state government revenue.

Bloomberg News

Proceeds of the bonds will finance or refinance the costs of various projects of the departments that have entered into lease agreements with the SPWB.

The negative outlook is based on the negative outlook assigned the state in May “reflecting a weakened and uncertain revenue environment that raises the possibility of extended pressure on the state’s budget,” Moody’s said.

The state’s enacted fiscal 2024 budget scaled back or delayed certain non-recurring spending in an effort to retain budget reserves; and a more complete and accurate picture of the state’s revenue collections will likely not be available until October given “an allowable shift in the income tax filing deadline. The delayed receipt of revenue leaves the state with less certainty around fiscal 2024 budgeted revenues and a narrowed window in which to respond to revenue collections that fall short of present assumptions,” Moody’s said.

The state government matched the IRS when it delayed the income tax filing deadline for almost every California county to October from April, citing disaster declarations.

Moody’s affirmed an Aa3 rating on existing SPWB debt, the rating is one notch lower than the state’s issuer rating to “incorporate the more essential nature of the state facilities financed with the debt, a moderate legal framework consisting of a continuing appropriation of lease payments, but risk of abatement if financed property is unavailable to the state, and the large inventory of property owned by the state from which a facility could be substituted into a lease in the event the base rental on the currently financed facility under the lease is abated.”

The rating agency had affirmed the Aa2 rating on the state’s general obligation bonds in May, citing the state’s massive economic base and healthy budget reserves and liquidity. The Aa2 rating on the state’s GO bonds is the same as the issuer rating due to the broad pledge on the bonds, despite a constitutional priority of funding education, Moody’s said.

The rating on the SPWB’s lease debt could be upgraded if the State of California’s issuer rating is upgraded, or downgraded if the state’s issuer rating falls. SPWB debt could also be downgraded if the legal framework supporting the payment of lease debt weakens, Moody’s said.

The lease revenue bonds are secured by a pledge of base rental payments to be made by participating state departments pursuant to their own individual lease agreements with the SPWB.

The SPWB is issuing the bonds under a stand-alone indenture. The bonds will not be secured by a debt service reserve.

“California is the largest state in the US based on its population of almost 40 million. The state’s estimated gross domestic product is $3.6 trillion,” Moody’s said. “This accounts for about 14% of US economic output and is larger than that of all but four other nations.”

The State Public Works Board, formed in 1946, is empowered to acquire, construct, improve, and operate public buildings and related facilities for state agencies. Since 1985, the SPWB has been active in the construction of facilities for purposes including higher education and corrections.

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