KEY TAKEAWAYS
- Despite negative fiscal headlines last year, Payden & Rygel maintained that markets were underappreciating California’s underlying credit strengths. That view was largely borne out, as GO ratings remained stable and revenues exceeded prior projections by approximately $16.8 billion.
- Total reserves are budgeted to rebound to $35.2 billion in fiscal 2026-27. While a significant portion reflects the restricted Proposition 98 Reserve, the state is also rebuilding flexible reserves and establishing a new unrestricted surplus holding account.
- California’s near- to intermediate-term credit outlook has improved, but underlying structural deficits of roughly $10 billion annually remain projected through fiscal 2029-30.
LOS ANGELES, Aug. 25, 2026 (GLOBE NEWSWIRE) — Payden & Rygel, a leading global investment manager, today released new research examining the long-term credit fundamentals behind California’s improving fiscal position. The paper, “California Credit: Looking Beyond the Headlines,” finds that stronger-than-expected revenues, improving pension funding and continued financial flexibility support stable credit quality over the near to intermediate term, while cautioning that much of the recent fiscal improvement reflects volatile revenue sources rather than a fundamental change in the state’s longer-term credit profile.
California’s general obligation bond ratings, Aa2 from Moody’s, AA- from S&P and AA from Fitch, remained unchanged over the past year. At the same time, revenue collections exceeded prior projections by approximately $16.8 billion, driven primarily by stronger-than-expected personal income tax receipts, particularly capital gains and stock-based compensation associated with California’s technology sector.
“Just as markets risked overreacting to deteriorating budget headlines last year, they now risk overreacting to improving ones,” said Travis McGahey, Vice President, Municipal Credit Analysis at Payden & Rygel. “California’s structural strengths remain intact, but so do its structural challenges.”
The report notes that the composition of California’s reserves matters as much as the headline number — in FY23-24, total reserves rose even as the state’s flexible rainy-day fund declined, with the increase driven by the restricted Proposition 98 Reserve. That’s not the case this time: the projected rebound to $35.2 billion in FY26-27 is driven by the Prop 98 Reserve, but unrestricted reserves are growing materially as well.
Long-term liabilities are also showing improvement. CalPERS reported a preliminary 14.8% investment return for fiscal 2025-26, its strongest result in five years, lifting its funded ratio to approximately 85% from 79% a year earlier. CalSTRS reported a 13.9% net investment return, nearly double its 7% target, which Payden & Rygel estimates is likely to improve its funded status as well.
Despite the stronger near-term picture, several structural pressures remain. Health and Human Services represents $145.2 billion, or 41.3%, of total state expenditures and is dominated by Medi-Cal, leaving California exposed to changes in federal healthcare policy and funding. Further reductions in federal support could require the state to redirect additional General Fund resources toward Medi-Cal and related programs.
In addition, even after the recent revenue surge, the administration’s budget projections and the Legislative Analyst’s Office’s independent estimates point to underlying structural deficits of roughly $10 billion annually through fiscal 2029-30. That represents a substantial improvement from estimates made last year, but it still suggests that ongoing revenues are not yet sufficient to cover ongoing expenditures on a sustained basis.
The report views Assembly Constitutional Amendment 20, which voters are expected to consider this November, as an incrementally credit-positive development. The proposal would strengthen California’s reserve framework by giving policymakers greater ability to set aside revenues during periods of exceptionally strong growth, complementing the state’s existing formula-driven reserve requirements.
Payden & Rygel is also monitoring a proposed state wealth tax because of California’s dependence on a relatively small number of high-income taxpayers. The proposal remains preliminary, however, and the firm currently views it as an issue to monitor rather than a material credit concern.
“California’s long-term credit trajectory will depend less on another year of exceptional capital gains realizations and more on policymakers’ ability to convert today’s fiscal strength into lasting structural resilience,” McGahey said. “We’ll be watching the outcome of November’s reserve amendment, the durability of capital gains-driven tax collections as the current technology investment cycle matures, and the state’s response to reduced federal healthcare funding over the coming year.”
About Payden & Rygel
Payden & Rygel is one of the largest privately-owned global investment advisers, managing approximately $164 billion in assets. Founded in 1983, the firm specializes in the active management of fixed income and equity portfolios, serving central banks, pension funds, foundations, and corporations worldwide. Headquartered in Los Angeles, the firm also maintains offices in Boston, London, and Milan. For more information, visit www.payden.com.
This material reflects the firm’s current opinion and is subject to change without notice. It 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.
Media Contact
Kate Ennis, DAI Partners
ennis@daipartnerspr.com
(301) 580-6726
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