Moody’s: Drought Poses No Risk to California’s Credit

Water Slide (Gordon Tarpley : Flickr : CC)
Gordon Tarpley : Flickr : CC

California’s record four-year drought will have little impact on the state’s overall economy, according to credit rating agency Moody’s.

The agency said in a report last week that because agriculture accounts for only a fraction of the state’s Gross Domestic Product (GDP), the drought will not significantly impact the state’s credit rating, according to Southern California Public Radio (SCPR).

However, the agency warned that could change if the drought lasts longer than the projected 12-18 months.

“We do not expect the drought to weigh heavily on California’s credit position unless the drought lasts significantly longer than our 12-18 month forecast period,” Moody’s reported. “While the state’s agricultural industry has national importance, it represents a very modest portion of the state’s gross product and employment.”

According to the agency, agriculture accounted for just $28 billion (1.4 percent) of the state’s $2 trillion GDP in 2013, even though the state is responsible for producing roughly half of the country’s fruits and vegetables.

And the small agricultural sliver of GDP isn’t down to the drought: “The share of GDP coming from agriculture has ranged from 1.0 percent to 1.4 percent for more than 15 years,” Moody’s noted.

Still, if the drought lasts longer than expected–and some NASA scientists believe that the chance of a “megadrought” lasting more than 30 years is not out of the question–then cities in California heavily reliant on agriculture could feel a credit squeeze.

“For these local governments, their economies/tax bases, which represents 30 percent of our baseline credit assessment of a local government, will in time show the effects of the lost agricultural employment and land value, if they haven’t already,” the report continues. “This will put downward credit pressure on these local governments.”

Moody’s also said the state’s individual water agencies, which have seen declining revenues in the wake of mandatory cutback orders issued by Gov. Jerry Brown, would need to increase water rates to maintain their strong credit ratings.

“We expect that customers will pay the increased rates, if implemented, without too much protest,” the report said.


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