California: Looking Past the Numbers

At first glance, California’s credit profile seems solid. The state has a multi-billion-dollar reserve cushion, steady revenue collections, and what I view currently as a balanced spending approach. For many investors, these headline figures provide reassurance, signaling a favorable investment opportunity in California municipal bonds. But in our line of work, feeling secure can be deceptive. And in California’s case, it could be dangerously so.

Fixed income investing, especially in municipal markets, demands more than just looking at past data and making future guesses. It requires intellectual discipline to question assumptions and the tools to identify risks that are often hidden by standard credit analysis. At Alvarez & Marsal Private Wealth Partners, we’ve developed proprietary models that extend beyond traditional metrics, encompassing physical, financial, and systemic risks associated with climate change.

Like many states prone to severe weather events, as seen in the recent wildfires, this type of analysis is critical when evaluating California.

Source: NOAAⁱ

In 2024, and as shown in the map below, the United States experienced 27 separate billion-dollar climate and weather disasters, trailing only the record-setting 28 events analyzed in 2023.ⁱⁱ California, with its ongoing wildfire threats, persistent drought problems, and extensive infrastructure, remains at the forefront of this trend. Many states and local governments depend on FEMA for funding assistance related to post-disaster recovery. However, the assumption that sufficient FEMA assistance will be available might no longer be valid.

Source: NOAAⁱⁱⁱ

A Shifting Federal Landscape

Federal disaster assistance is not unlimited. As costs increase and political priorities shift, we believe investors should anticipate a reduced scope and scale of FEMA funding, particularly for states that experience repeated losses. We believe this raises an important question for municipal bondholders: Are you being adequately compensated for the risk of diminished federal support when the state needs it most?

In California, reliance on FEMA can be high. We believe a cutback in funding—whether due to policy changes or budget limitations—could significantly expose state and local governments. For investors holding California General Obligation bonds or local credits linked to vulnerable areas, this risk may not be fully reflected in the prices.

Other Headwinds to Monitor

FEMA is only one part of the picture. We believe investors should also be monitoring for:

• Medicaid Cuts: Proposed cuts could strain state healthcare systems, especially in underserved areas, which in turn could impact state finances.
• Antiquated Rating Methodologies: Legacy agency models may still fall short in fully capturing long-tail risks, such as climate-related issues, insurance gaps, and systemic infrastructure stress. As a result, ratings might give an overly optimistic view of long-term creditworthiness.

The key takeaway? Credit analysis in 2025 and beyond demands sharper tools. The market may not only be mispricing risk but also possibly concentrating on the wrong aspect entirely.

At A&M Private Wealth Partners, we don’t just depend on the data. We challenge it. We ask difficult questions, explore uncomfortable scenarios, and develop models that recognize a world where “unprecedented” has become standard.

Because in this market, discipline isn’t just wise; it’s essential.