SAN FRANCISCO — California is not Greece, according to Standard & Poor’s.
The rating agency said in a report released Tuesday that comparisons between the most populated U.S. state and Greece’s financial quagmire are overblown.
“We believe that some of the perceptions about the similarities between California and Greece occasionally noted in the media do not hold up to closer scrutiny,” Standard & Poor’s analyst Gabriel Petek said in the report.
In a separate report released Tuesday, Fitch Ratings said it expects continued pressure on California school districts, leading to further negative rating actions.
Standard & Poor’s rates Greece BB-minus on a negative watch while it rates California A-minus with a negative outlook.
Petek said it is incorrect to conclude that both governments have comparable debt burdens.
California’s gross domestic product reached $1.9 trillion in 2010 compared to Greece’s $305 billion, while the state’s real GDP growth rate is projected at 2.9% in 2011 versus Greece’s negative 3.5%, according to the report.
California is one of the top ten largest economies in the world.
The report also noted that Greece’s debt to GDP ratio is 153% compared to California’s 4.6% state government debt to gross state product.
California’s capacity to repay its debt, despite worse budget problems compared to other states, remains strong, according to the rating agency.
The report cited the state’s economic diversity, modern economy and the elasticity of many of its markets.
Petek said Greece’s budget problems are also worse compared to California since the Golden State has a comparably better political environment and smaller budget imbalances, even when adjusting for a wider scope of spending.
In California, the state constitution requires the state to adopt a balanced budget, which is not the case in Greece. Additionally, California must pay debt service ahead of all other obligations except for education, which is the top expenditure.
Petek said California benefits from Federal budget support while Greece is forced to rely on extraordinary loans from the European Union and the International Monetary Fund.
The report did note some similarities between the two economies, including that both have experienced severe recessions with high unemployment rates and both face deep budget deficits that have increased borrowing costs.
“Both governments face deep budget deficits, which we have seen complicated liquidity management for California and undermines investor confidence in the fiscal credibility of Greece,” the report said.
A majority of California’s budget has also already been allocated through voter-mandates, leaving the legislature will little flexibility.
Fitch said Tuesday it has taken negative actions on 16 school districts, 30% of all the school districts it rates in California, since the beginning of 2010. It said 37 school districts have been affirmed while just one was upgraded.
Fitch said the trend may worsen in fiscal 2012 and could further accelerate if the state decides to cut further into school spending.
In fiscal 2011, the state suspended Proposition 98 that sets a constitutionally guaranteed minimum funding level to be spent by the state on education.
The state’s school districts are under fiscal stress from reduced state funding, an end of one-time federal revenues, shrinking enrollment and tax bases and diminished spending flexibility, according to Fitch.
“Since most school districts have almost no control over their revenues, prudent management practices and expenditure controls are crucial to maintaining credit quality in this challenged environment,” Fitch said in the report.
“Although many districts have responded with sufficient offsetting expenditure reductions, others lack the ability or willingness to do so.”
