California's Financial Stability Remains Strong Amid Fiscal Concerns

Recent apprehensions regarding California’s fiscal health have surfaced due to declining initial public offering (IPO) volumes, reduced federal funding, and rising expenditures. However, a new report from Payden & Rygel, a prominent investment advisory firm, suggests that the risk of a bond default or significant credit deterioration for the state remains low. The analysis indicates a stable outlook for California’s finances over the next one to two years, despite some softening in revenue projections.

The report, authored by Payden & Rygel’s California Municipal Social Impact Fund team, emphasizes that while concerns about the state's ability to generate sufficient revenue to match expenditures are valid, the overall financial picture is not as dire as some have suggested. According to the report, "Although the revenue picture is softening, the outlook remains relatively stable over the next 1-2 years, with potential credit rating deterioration limited to just one notch in a worst-case scenario."

Key factors supporting this optimistic outlook include California’s robust legal framework, stable credit ratings across major agencies, and strong economic fundamentals.

### Legal Protections and Credit Stability

The report highlights the legal restrictions under the 10th Amendment, which prohibits states from filing for bankruptcy. This constitutional safeguard means that while defaults are technically possible, California is currently far from reaching such a critical juncture. According to the report, "California is nowhere near default based on current indicators."

Furthermore, the credit ratings assigned by major agencies, including S&P, Moody’s, and Fitch, remain stable at AA-/Aa2/AA, respectively. These ratings reflect California's capacity to manage its fiscal responsibilities effectively, even amid economic fluctuations.

### Economic Factors and Revenue Projections

The state’s economy ranks fourth globally, surpassing Japan, with a diverse and innovative economic base. However, recent trends have shown a decline in tax revenues, primarily due to weaker IPO activity, which the report attributes to a normalization process following the COVID-19 pandemic rather than underlying structural weaknesses. Governor Gavin Newsom’s recent budget revision projected a relatively modest $12 billion surplus for the upcoming fiscal year, indicating that while tax revenues are declining, California's economy still exhibits resilience.

### Managing Liabilities and Future Outlook

California's debt service levels remain manageable at 3-4% of government expenditures, and pension funding is deemed solid. The report notes, "Revenue would need to drop over 50% to threaten debt service," emphasizing the state’s capacity to navigate through fiscal uncertainties.

Moreover, the authors of the report are closely monitoring federal policy proposals that may impact entitlement spending, particularly Medicaid, but they anticipate these cuts will be less drastic than feared. "Ultimately, we expect Medicaid cuts to be less pervasive than currently feared," they stated.

### Conclusion

In summary, while recent headlines regarding tariffs, fiscal tightening, and economic uncertainty have heightened market anxiety, Payden & Rygel’s report underscores a resilient financial framework for California. The state continues to demonstrate a strong capacity for revenue generation, supported by a diversified tax base and substantial reserve levels. As California approaches the finalization of its FY 2026 budget, the implications of these findings will be closely observed by investors and policymakers alike. This comprehensive analysis offers a grounded perspective on California’s fiscal health, challenging narratives of impending default and credit crises.

### About Payden & Rygel

Founded in 1983, Payden & Rygel is one of the largest privately-owned global investment advisers, managing approximately $165 billion in assets. The firm specializes in active management of fixed income and equity portfolios, providing investment strategies to a wide array of clients, including central banks, pension funds, and private banks. This material reflects the firm’s current opinions and is subject to change without notice. Past performance is no guarantee of future results.