(The Center Square) – Global credit ratings agency S&P warned California’s ongoing wildfires could put the credit ratings of affected utilities and government agencies at risk.
“Many entities we rate, including not-for-profit electric and water and sewer utilities, local governments, and school districts, have assets and tax bases in the areas with active fires,” said S&P.
While S&P was clear to note the report does “not constitute a rating action,” the report is consistent with its earlier warnings that California out-migration resulting from fire-related insurance issues could put public finances at risk.
Most of California’s largest cities face major financial difficulties, including Los Angeles, which the city controller has declared “broke.”
In late 2023, S&P downgraded the state’s bond outlook from “positive” to “stable,” S&P — a move that did not downgrade the actual ratings of the state’s general obligation bonds, but still signaled some caution about the state’s finances.
Earlier this week, California Gov. Gavin Newsom previewed a $322 billion budget proposal, including a $7.1 billion withdrawal from the state’s rainy day fund.
Newsom’s proposed budget is up $24.3 billion from the year prior, despite the state’s nonpartisan, state-funded Legislative Analyst’s Office firmly stating the state has “no capacity for new commitments” and faces deficits of $20 billion or more starting in 2026.
The near-insolvency of the state-regulated fire insurer of last resort could put further strain on state budgets.The last-resort FAIR plan has only $200 million in cash on hand, and $2.5 billion of reinsurance, meaning that any claims in excess of $2.7 billion will be passed on to customers via assessments or taxpayers via bailouts from the state or federal government.
The state would have to approve any assessments — which could be in the thousands, or even tens of thousands of dollars — to cover claims for what is projected to be the most costly fire in U.S. history.
Whatever the state does not approve in assessments to plan customers would have to be filled in by state funding — which would have to come either from reallocations of existing funding, or from tax increases — or a federal bailout.
This potential reliance on a federal bailout would create additional complications for the Newsom administration, which started its special session to “Trump proof” the state by putting aside funding for lawsuits against the incoming Trump administration on issues of contention that are likely to range from the state’s sanctuary law policy to its environmental policies phasing out many forms of diesel and gasoline powered transportation.
Should the state have to rely on Republican Congress and a Trump signature to get assistance for a wildfire that forestry experts say has been compounded by state permitting and environmental policy, it’s likely that funding may come with strings attached. This would leave Newsom forced to choose between upsetting half a million property owners by passing on a major assessment to them, or by compromising on some of his public policy commitments.
