California's rating outlook was revised to negative from stable Thursday by Moody's Investors Service amid the state's
The rating agency also affirmed the Aa2 rating on the state's general obligation bonds, citing the state's massive economic base and healthy budget reserves and liquidity.
The Aa2 rating on the state's general obligation 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 state holds an AA rating from Fitch Ratings with a stable outlook and an AA-minus rating from S&P Global Ratings with a positive outlook.
"The negative outlook reflects a weakened and uncertain revenue environment in California that raises the possibility of extended pressure on the state's budget," Moody's analysts Matthew Butler and Henrietta Chang said in the report.
This comes just under a week after Gov. Gavin Newsom released his May budget revisions, in which he said the budget shortfall had grown to $31.5 billion and that the IRS's decision to give taxpayers in flood-damaged counties until October to file income taxes would push out $49 billion in anticipated revenues until then.
Both the state and the federal government announced earlier this year that taxpayers in 55 out of the 58 counties could delay filing until then.
Moody's noted the governor has proposed scaling back or delaying certain non-recurring spending in an effort to retain budget reserves through fiscal 2024, which begins July 1; but that a more complete and accurate picture of the state's revenue collections will likely not be available until October.
"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," analysts said.
For the outlook to return to stable, there would need to be greater certainty around revenue performance and the state's capacity to balance near-term budget gaps without substantial use of reserves, Moody's analysts said.
"Despite changing the state's outlook, Moody's has affirmed the state's Aa2 issuer rating, which indicates high-quality obligations subject to very low credit risk," Joe DeAnda, spokesman for State Treasurer Fiona Ma, said in a statement. "The State Treasurer's Office recognizes the revenue uncertainties that led to this outlook change; however, it does not currently expect this change in outlook to result in higher interest costs or any other material impacts on its ability to sell long-term debt on behalf of the state."
