California Warns Investors Virus May Affect its Finances

(Bloomberg) -- California, home to the world's fifth-largest economy, warned investors that the coronavirus and the concurrent global market declines could hit its finances.

“There can be no assurances that the spread of a novel strain of coronavirus called COVID-19 will not materially impact the state and national economies and, accordingly, materially adversely impact the general fund,” California said in documents circulated to investors for its bond sale next week. “While the effects of COVID-19 on the state may be temporary, it appears to be altering the behavior of businesses and people in a manner that may have negative impacts on global and local economies.”

California is selling $2.2 billion in general-obligation bonds next week, with a retail order March 9 and pricing March 10.

While California has enjoyed a robust recovery from the recession, with credit ratings the highest in nearly 20 years and unemployment at a record low, it is vulnerable to market declines because of its reliance on the wealthy to fund its services.

About 70% of the state's general fund comes from personal income-tax receipts and the top 1% of taxpayers accounted for 47% of such collections in 2017, the bond documents say. Such people have their fortunes tied to the stock market -- capital gains accounts for about 10% of the state's annual revenue this year. That leads to volatility generally, and “stock markets in the U.S. and globally have seen significant recent declines that have been attributed to coronavirus concerns,” California said in the documents.

The state told investors that while the impact is “currently uncertain,” it may become a factor in Governor Gavin Newsom's updated budget for the next fiscal year, to be released in May.

To contact the reporter on this story: Romy Varghese in San Francisco at rvarghese8@bloomberg.net

To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, Michael B. Marois, William Selway

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