Credit analysts aren’t viewing California Gov. Gavin Newsom’s recall election — a near certainty at this point — as a credit issue.
Secretary of State Shirley Weber
“This now triggers the next phase of the recall process, a 30-business-day period in which voters may submit written requests to the county Registrars of Voters to remove their names from the recall petition,” Weber said. “A recall election will be held unless a sufficient number of signatures are withdrawn.”
Frustrations around pandemic-related business closures provided momentum to the Republican-led recall drive.
Without the withdrawing of signatures or a successful court challenge, it appears certain there will be a recall election this fall.
“Fitch does not view the runoff election as a near-term credit issue,” said Karen Krop, a Fitch ratings senior director of public finance. “Although it may be disruptive, we believe the institutional structures around the budget and financial management are sound and can withstand this kind of uncertainty.”
The ratings tend not to change as governors change, unless it results in a sharp change in policy over the long-term, said David Hitchcock, an S&P Global Ratings senior director. “It’s a long-term rating,” he said.
Even after the 2003 recall election that deposed Gov. Gray Davis, a Democrat, and ushered in Republican Gov. Arnold Schwarzenegger, there was no rating change, Hitchcock noted.
With a surplus and flush with stimulus cash, California’s finances are also in a much better place fiscally than they were during the energy crisis in the early 2000s that led to Davis’ recall.
The state’s S&P rating had fallen to triple-B in July 2003, with a negative outlook during the energy crisis that occurred under Davis’ watch, Hitchcock said. The state had an A2 from Moody’s Investors Service with a negative outlook in August 2003 and a BBB rating with a negative outlook from Fitch in December 2003.
The state currently holds ratings of AA from Fitch, Aa2 from Moody’s and AA-minus from S&P. All recently affirmed the ratings with stable outlooks.
The year after Schwarzenegger took office the state’s rating climbed to A, but Hitchcock said that was because the state issued deficit financing that eliminated some of the immediate credit issues.
During the energy crisis, Hitchcock said, the state was paying significant amounts out of its general fund for power and had depleted its reserves.
“Those were different people and it was a different period in time,” he said. “It doesn’t necessarily reflect what is happening now.”
S&P does incorporate the potential for frequent voter initiatives or recall elections into its methodology under its governance framework, Hitchcock said.
But the scandals that forced resignations of Republican Alabama Gov. Robert Bentley in 2017 and Republican Missouri Gov. Eric Greitens in 2018 — both from sexual scandals combined with charges of misuse of campaign funds — didn’t result in rating changes, said S&P analyst Oscar Padilla.
Heading into the May revise of the governor’s proposed budget, S&P analysts are closely tracking whether the governor and Legislature will use the state’s surplus bounty and the money it will be receiving from the American Rescue Plan for one-time budget items or for new programs with ongoing expenses, Hitchcock said.
“We do think California has done the right thing over many budgets,” Krop said.
The state has had a trend over the past 10 years, and through two administrations, of maintaining a balanced budget and did address the previous overhang of budgetary borrowing, she said.
“This is disruptive, but it doesn’t indicate a fundamental change in credit policy,” Krop said. “If we get a new governor that does something radically different, then we would assess it differently.”
