Default ahead for California? Unlikely, says New Report From Payden & Rygel's California Municipal Social Impact Fund Team

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LOS ANGELES, June 09, 2025 (GLOBE NEWSWIRE) -- Recent concerns over California's fiscal health-driven by declining initial public offering (IPO) volume, reduced federal funding risk, and rising costs-have prompted questions about the state's financial stability. However, after a thorough analysis, Payden & Rygel's market-leading municipal bond team believes the risk of a bond default or severe credit deterioration remains low.

"While we understand investors' concerns about the California economy, its capacity to generate adequate revenue to match spending levels and the potential impact on the state's municipal debt, we believe that 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 over that timeframe in a worst case scenario. Near term ratings will hinge on the final FY 26 budget that we expect Sacramento to pass by June 15^th, otherwise lawmakers don't get paid,” say the report's authors, the Payden & Rygel's California Municipal Social Impact Fund team.

"We are also closely monitoring the evolution of entitlement spending reduction proposals at the federal level but ultimately expect Medicaid cuts to be less pervasive than currently feared,” they added.

Here are six reasons to be optimistic:

Reason 1: Legal structure.

The 10^th amendment prohibits states, including California, from filing for bankruptcy. While defaults are technically possible, California is nowhere near default based on current indicators.

Reason 2: Strong revenues, limited impact from IPO weakness

With less than a month in the current fiscal year, tax revenues are weakening but remain strong, with Governor Newsom's recent May Revision projecting a relatively small $12 billion projected for next year. IPO activity, while down, is not a core revenue driver. Its recent decline reflects a normalization post-COVID stimulus, not a structural weakness.

Reason 3: Credit ratings are stable

All three major credit agencies S&P, Moody's, and Fitch-rate California AA-/Aa2/AA, respectively, all with stable outlooks but we expect the ratings agencies to refine their views this summer following the finalization of the FY 2026 budget process by the end of June.

Reason 4: A strong economy with healthy reserves

California's gross domestic product (GDP) ranks #4 globally, recently surpassing Japan, underscoring a broad, diverse and innovative state economy with a deep employment base. Although reserves have dipped since 2023 due to pandemic fund drawdowns and budgetary uncertainty in FY 2023/2024 due to delayed tax receipts, they remain at comparatively strong levels historically that will grant state leadership time to navigate federal policy uncertainty, which Governor Newsom blames for a softening of revenue.

Reason 5: Manageable liabilities

Debt service is low at 3-4% of governmental expenditures, and pension funding remains solid. Because of constitutional protections that prioritize education and debt payments, revenue would need to drop over 50% to threaten debt service. For context, State revenues dropped 15% in 2008.

Reason 6: Credit conditions are weakening but remain healthy

Despite uncertainty, California retains healthy credit fundamentals with relatively stable ratings, manageable deficits, excellent access to liquidity and conservative budgeting assumptions that support bondholder confidence.

In summary, while recent headlines surrounding tariffs, fiscal tightening, and economic uncertainty have contributed to heightened market anxiety, our base case remains firm: Although California's credit profile is softening, it continues to demonstrate resilience, supported by a vast and diversified tax base, substantial reserve levels across all governmental funds, and long-term liabilities that we consider both moderate and manageable.

Here is a link to the full report.

ABOUT PAYDEN & RYGEL

With $165 billion under management, Payden & Rygel is one of the largest privately-owned global investment advisers focused on the active management of fixed income and equity portfolios. Payden & Rygel provides a full range of investment strategies and solutions to investors around the globe, including Central Banks, Pension Funds, Insurance Companies, Private Banks, and Foundations. 

This material reflects the firm's current opinion and is subject to change without notice. Sources for the material contained herein are deemed reliable but cannot be guaranteed. This material is for illustrative purposes only and does not constitute investment advice or an offer to sell or buy any security. Past performance is no guarantee of future results.

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