California’s late financial reports get rating agency attention

California’s late audited financial statements continue to be a topic of discussion for agencies rating the state’s bonds.

Fitch Ratings noted that the state was significantly late in producing its annual comprehensive financial report for fiscal year 2021 in a ratings report issued ahead of the state’s plans to price $2.6 billion in general obligation bonds on Sept. 7.

“Habitually delayed publication of audited financial results, beyond 270 days of the end of the fiscal year, can be an indication of management weakness,” Fitch analysts wrote.

The fiscal 2021 ACFR, for the year ending June 30, 2021, was released in March 2023; and the California state auditor estimates the fiscal 2022 ACFR will be released in the winter of 2024.

The bonds, slated to price by negotiation in a deal led by Citi and RBC Capital Markets, will finance voter-approved projects, pay down commercial paper and refund outstanding GO bonds for debt service savings.

Despite the late ACFRs, Fitch said it “remains confident that the state provides transparency on its financial operations through an abundance of financial, budgetary, and revenue information that is robust and timely.”

State officials continue to cite difficulties implementing a new state government-wide financial management system called FI$CAL for years of delayed ACFRs.

The Financial Information System for California was launched in 2019. FI$CAL is supposed to combine the state’s accounting, budgeting, cash management, procurement, and other operations into a single, modernized system.

Fitch analysts mentioned the tardy ACFR in its ESG section, and called it an “emerging issue related to Data Quality and Transparency.”

The state received an ESG score of 3, a score that “means ESG issues are credit-neutral or have only a minimal credit impact on the entity,” according to Fitch, which says ESG Relevance Scores are not inputs in the rating process.

S&P Global Ratings has mentioned the late ACFR’s in ratings reports as well, though they’ve triggered no rating action from any agency.

S&P affirmed California at AA-minus with a positive outlook Thursday.

“One credit constraint includes the state’s chronically late release of financial audits, using generally accepted accounting principles” S&P analysts wrote in last week’s report. “We believe timely release of ACFRs would aid California in reporting transparency and help validate budgetary basis disclosures and improvements in revenues and fund balances.”

“The state has continued to release timely unaudited monthly agency cash revenue reports and controller’s monthly reports on cash receipts and disbursements, though these are not reported on a GAAP basis and lack the ACFR’s required supplementary financial notes regarding pensions, OPEB, and other disclosures,” S&P analysts wrote.

Moody’s affirmed an Aa2 rating with a negative outlook, and Fitch an AA rating with a stable outlook ahead of the bond sale.

“The negative outlook reflects a weakened and uncertain revenue environment in California that raises the possibility of extended pressure on the state’s budget,” Moody’s analysts wrote.

The state’s enacted fiscal 2024 budget “scaled back or delayed certain nonrecurring spending in an effort to retain budget reserves. However, a more complete and accurate picture of the state’s revenue collections will likely not be available until October given an allowable shift in the income tax filing deadline,” Moody’s analysts wrote.

The state’s ongoing problems with FI$CAL and delays in releasing its ACFR also remain an area of concern to the state auditor, who categorized it as “high risk,” in a recent report to the governor.

“The State’s financial reporting for fiscal year 2021–22 is already past due,” the auditor’s report said. “This continued trend of late reporting reduces the efficiency and effectiveness of the State’s financial oversight.”