S&P says California outmigration could result in state credit downgrade

(The Center Square) - According to a new analysis from S&P Global, the steady flow of property insurers leaving the California market is resulting in skyrocketing insurance premiums from remaining providers, likely driving even more people to leave the state as property becomes even more unaffordable to own and maintain. Analysts at S&P Global believe this will impact credit ratings for California public finances as outmigration accelerated by cost increases could, “absent the state’s ability to adapt by cutting expenditures” and “lead to credit quality deterioration.”

State Farm and Allstate recently announced they would stop accepting new homeowner insurance customers in California, and only maintain coverage for existing policy renewals, based, at least in part, on concerns about rising wildfire risks. Analysis from The Center Square has identified roughly 40% of forests in California, or roughly 7.5 million acres of federal forests and 5.6 million acres of state-managed forests are in need of treatment for dangerous buildup of brush that leads to wildfires. At the state’s current rate of fire-risk treatment of just 100,000 acres per year, it would take California 56 years to clear its current backlog, not counting the new areas in need of treatment each year.

Rising property insurance rates are expected to put further pressure on the cost of living in California, of which housing costs are the largest and most expensive portion of living expenses. With 61% of California residents polled saying the cost of living is the number one reason they are considering leaving California, and four in every ten Californians are considering moving to another state, further increases in the cost of housing will drive even more people out of California. Loss and aging of California’s population is projected to decrease economic output and the availability of taxable income and spending from the government while increasing the relative number of beneficiaries to workers.

“A slowing revenue environment, absent an issuer’s ability to adapt by cutting expenditures, in the long term could result in budgetary pressure that ultimately lead to credit quality deterioration,” wrote the S&P report’s authors.