Two thumbs up for California
Moody’s rating agency upgraded California’s credit rating this week, a move that signaled growing confidence in the Golden State’s rebound after its budget was one of the hardest hit during the Great Recession. In its June 25 upgrade of the state to Aa3 (from A1), Moody’s noted California’s improving financial condition and manageable fixed costs. That's the highest rating California has achieved in 13 years.
In particular, Moody’s applauded “positive governance changes” like a proposed constitutional amendment to create a rainy day fund to cope with volatility by tapping capital gains and general fund revenues each year. The state aims to have $1.6 billion in the fund by the end of Fiscal Year 2015. And though California’s $107 billion unfunded pension liability is among the largest in the nation, Moody’s noted that funding the annual costs of those liabilities are manageable for a state with one of the largest operating budgets in the country.
The rating change affects $86 billion in outstanding debt.
Just so-so for the rest of the country
Meanwhile, most of the country is having pretty slow growth this year. In RBC Capital Markets’ heat map for states, analyst Chris Mauro noted that recent statistics point to a slowdown in economic development in many states. “The first quarter of 2014 continued the trend of softer economic data with only five states moving to a higher tier in our Heat Map and seven states moving to a lower one,” Mauro wrote. However, this year’s there’s been a shift. This time the weakness throughout the quarter came from a mix of states in the Midwest and the South (which typically post stronger economic growth numbers), while most of the improvement came from states in the Northeast. Part of the reason is likely because of lower crop prices, which severely affected on farm income in the Plains states. The plunge in farm income knocked North Dakota from the RBC’s top tier, for example. Housing prices in some areas continued to rebound as eight states posted a larger than 10 percent gain in the first quarter compared to the first quarter of 2013. Nevada and California led the charge, each with gains of 19 percent.
In general, economists are already chalking up 2014 as a “transitional year.” That is one of growth – but slow growth. The financial services company Keefe, Bruyette and Woods predicted that real GDP growth this year will hit 2.1 percent while growth in 2015 will be 3.1 percent (a rate most economists peg as steady or healthy growth).
But chin up – pensions aren’t completely horrible anymore!
Standard and Poor’s rating agency released a report this week with some mixed news: U.S. state pension funding levels continued to decline. Not good news. But here’s the silver lining – they “have likely bottomed out” as the country is now far enough removed from the effects of the 2008 and 2009 stock market crash so that those figures are no longer bringing down pension valuations. Most pension funds “smooth” their valuations, meaning actuaries average the investment performance over the past five or so years and apply that average to the valuation of their funds. Because the rolling average included the market downturn of 2008, it’s hurt the valuation of funds. But now, thanks to new accounting rules and it's been more than five years since the recession began, those negative numbers will stop playing a role in today’s valuations.
Still, the report, which is available to subscribers, noted that there remain longer-term challenges like growing costs for retirees.
"Although this is likely the low point, which is good news, we believe pension funded level recovery could be slow and uneven and sizable funding gaps will remain for most states," S&P credit analyst John Sugden said in a statement. “While reform efforts continue, which will help over the long term, we see continued pressure related to market volatility, increased competition for limited state financial resources, and changes in actuarial assumptions.”