Fitch Upholds ‘A’ Rating for California General Obligation Bonds

When CalPERS moved last week to implement 99 new types of pensionable compensation, Fitch publicly mused whether the action was a “step backward” from the state’s recent pension reforms.

But the rest of California’s economy, combined with provisions in the most recent budget which increase state funding to CalPERS and CalSTRS, was enough for Fitch to uphold its ‘A’ rating on the state’s GO bonds.

From a Fitch release:

Pension funded ratios have declined and there is a history of inadequate contributions to the teacher system; however, the state has instituted some benefit reforms and the fiscal 2015 enacted budget provides the first installment of a long-term plan to increase funding of the teacher pension system.

Full actuarial contributions to the public employees’ system are legally required, but not for the teachers’ system, leading to persistent underfunding of the latter. The state addressed teachers system funding with legislation enacted in June 2014 that will increase statutorily required contributions to the system from the state, school districts, and teachers beginning in the current fiscal year. The legislation gradually increases funding requirements, with the first installment funded in the fiscal 2015 budget, and expects that it will be fully funded by 2046.

Fitch notes that it doesn’t believe California’s two main pension funds, CalPERS and CalSTRS, are necessarily as healthy as their current funding ratios indicate. Still, a diverse economy and the hope of “improved fiscal management” were among the factors that led Fitch to avoid downgrading the state’s debt.

Fitch explains:

System-wide funded ratios on a reported basis for the state’s two main pension systems, covering public employees and teachers, have eroded due to investment losses. Based on their June 30, 2013 financial reports, the public employees’ plan reported an 83.1% system-wide funded ratio, and the teachers’ plan reported a 67% system-wide funded ratio.

Using Fitch’s more conservative 7% discount rate assumption, funded ratios for the two systems fall to 78.8% for public employees and 63.5% for teachers. On a combined basis, net tax-supported debt and pension liabilities attributable to the state at 8.3% are above the state median of 6.1%, ranking the state 31st.

The state adopted a broad package of pension reforms in 2012 that affect most state and local systems, including through benefit reductions for new workers and higher contributions for employees. While changes are expected to generate only modest near-term annual savings for the state and for local governments whose pension plans are subject to the reforms, annual savings are expected to grow considerably over time.

Fitch considers California’s GO bond outlook to be “stable”.

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