California achieved a balanced FY25 budget, but outyear issues remain

Bonds

California’s fiscal 2025 budget dealt with the revenue gap that emerged in fiscal 2024, but further actions will be needed to achieve fiscal balance in out years, according to a Fitch Ratings commentary.

“While further adjustments may be necessary to align spending with the lower revenue trajectory, Fitch believes this budget allows California to retain strong gap-closing capacity, supporting its AA/Stable issuer default rating,” wrote Karen Krop, a Fitch Ratings senior director in the U.S. Public Finance Group, and Sarah Repucci, a senior director for Fitch Wire, a specialized research team in credit policy, in a commentary published Monday.

The state holds Aa2 rating from Moody’s Investors Service and AA-minus from S&P Global Ratings. It has a negative outlook from Moody’s and stable outlook from S&P.

The fiscal 2025 budget signed by California Gov. Gavin Newsom on June 29 closed a $44.9 billion deficit in the fiscal 2024 budget that arose after projected revenues failed to materialize. The state also passed a structurally balanced budget for fiscal year 2025-26, Newsom said, when he signed the budget.

“California’s rollercoaster revenue performance during and immediately after the pandemic complicated budget planning and required the state to take balancing actions more typically seen in economic downturns,” Krop and Repucci wrote.

The state experienced strong revenue in fiscal years 2021 and 2022, enabling it to build its general fund balance to over $60 billion, but then revenues for fiscal years 2023 and 2024 fell a combined $62 billion (14.5%) short of the forecasts upon which the respective budges were based, the analysts wrote.

Fitch analysts also pointed to the difficulties in crafting the fiscal 2024 budget after the Internal Revenue Service, and then the state, delayed the income tax filing deadline in 2023 to Nov. 15, 2023 after the state experienced severe flooding. The delay meant that actual revenue numbers didn’t come until months after the June 29 signing of the 2024 budget.

The financial picture for the current year shows some good news for revenues.

“Despite falling below the original budget forecast in fiscal 2024, revenues forecast as of the enacted budget are expected to increase 6.5% year-over-year to an estimated $190.3 billion, nearly 33% above the pre-pandemic level, representing a rapid [compound annual growth rate] of 5.8%  over five years,” the Fitch analysts wrote. “The initial year-end reports indicate revenues outperformed this estimate by at least $3 billion. For fiscal 2025, the state expects to collect $207.2 billion.”

“While further adjustments may be necessary to align spending with the lower revenue trajectory, Fitch believes this budget allows California to retain strong gap-closing capacity, supporting its AA/Stable issuer default rating,” wrote Karen Krop, a Fitch Ratings senior director in the U.S. Public Finance Group, and Sarah Repucci, a senior director for Fitch Wire.

Fitch Ratings

The state is cutting expenditures, raising revenues, drawing on reserves and implementing one-time measures to return to structural balance, Fitch analysts said.

Among those measures, Fitch said, the fiscal 2025 budget defers $1.6 billion in general fund spending by shifting one pay period from fiscal 2025 to fiscal 2026 and delays $524 million in payments to state university systems. It also includes 7.95% in cuts to most state agencies and the elimination of funding for empty positions.

It also shifted $6 billion of spending from the general fund to other funds, a shift that could be repeated in future years. It also achieved additional savings by suspending the Proposition 98 school funding minimum guarantee in fiscal 2023-24, lowering the state’s obligation, but creating a future repayment obligation.

“The budget reduces ongoing spending by $16 billion to better align expenditures with revenues, which are returning to historic growth trends after pandemic-related volatility,” Fitch wrote.

To close the fiscal 2024 gap, lawmakers depleted the $8.4 billion contained in the Proposition 98 public school reserve account, and then to pass balanced fiscal 2025 budget, it tapped $51. billion from the rainy day fund, and also proposed further drawing down reserves in fiscal 2025 to 10.7% of revenues, Fitch analysts said.

The budget tapped reserves, but Newsom said it also preserved budget resilience by maintaining $22.2 billion in total reserves at the end of the 2024-25 fiscal year.

Articles You May Like

Florida issuer bringing speculative-grade college housing bonds
Tether is drawing heat from law enforcement. But it has a new friend in the White House
Assad flees Syria for Moscow as rebels seize Damascus
Musk’s DOGE targets Cali bullet train
Romania scraps presidential election after alleged Russian meddling