Report: Drought No Problem for State Finances or Credit — Yet

Moody's Investors Service, one of the agencies that issues ratings for public agency bonds, has some good drought-related news to share. So far, Moody's says, the drought has not had a "material adverse impact" on state or local governments, and it's not expected to adversely affect their credit. Translation: If you're a bondholder, you don't have to worry about getting paid. If you're a local official wanting to float bonds, the drought shouldn't get in your way.

Moody's also says — no surprise here — that the financial impact of the drought will be felt most heavily in the state's agricultural centers.

By this time, most of us city dwellers have heard about the drought's impact on California's farms, farmers and farm communities. After three years of below-normal rainfall and a nearly nonexistent snowpack this year, many farmers won't get water from state and federal sources this year and hundreds of thousands of acres will go unplanted. Just Monday, UC Davis came out with a report saying the drought will have $1.67 billion impact, directly and indirectly. The study says the equivalent of 14,500 jobs will be lost, along with $555 million in household wages and $853 million in gross domestic product.

Those are big numbers. What do they mean for the state as a whole?

The state Department of Food and Agriculture says California farms and ranches raked in $42.6 billion in 2012. The federal Bureau of Economic Analysis says agriculture's contribution to the state's gross domestic product is roughly $30.2 billion. That makes us the No. 1 state in the nation for farm receipts. Beyond that, it's well known that California is an essential producer of many crops — grapes, almonds and citrus, for instance. And the state's agricultural sector has reminded us often during the deepening drought just how important farms are to the rest of us.

But Moody's is concerned about revenue streams and creditworthiness and long-term impacts. It casts a cold eye not only on the drought's impact on the state's farm counties so far but also on on the relative economic importance of agriculture in the California economy.

Says Moody's:

The state’s agricultural industry is a modestly sized component of the state’s overall economy, thereby limiting its overall impact on the state. The current drought is also not likely to materially reduce revenues for most cities and counties, even those with agricultural concentration.

And:

Although California is one of the country’s largest agricultural regions and accounts for substantial, if not entire, portions of certain crops, the current drought will not weigh heavily on the state’s economy because agriculture comprises just a small proportion of the state’s total economy

Wait. Agriculture's "a modestly sized" part of the state's economy?

How could that be? I asked several co-workers to guess what share of the state's gross domestic product comes from agriculture. The range ran from 20 to 80 percent. My guess would have been about one-third.

Which means none of us thought hard enough about the question, because Moody's points out that agriculture accounts for just 1.5 percent — yes, one-point-five percent — of the state's GDP. What's easy to forget about California is that by itself it's one of the world's largest economies, with a 2012 GDP just north of $2 trillion, and is driven by sectors like technology, construction and health care. So, from Moody's point of view, our farm water problem and its effect on the bigger economy and government revenue is just not that big a deal.

Moody's also says that even in the state's most important farm centers, the drought's economic and revenue impact will be less than devastating. That's because most of the general revenues for local governments and districts come from property and sales taxes, which Moody's says are unlikely to take a major hit in the near term. The sales tax impact will be limited in farm counties, Moody's notes, because of long-entrenched economic factors:

In part due to the lower wages and seasonality of agricultural jobs, the state’s agriculturally concentrated counties tend to have high unemployment and poverty rates and lower, average wealth levels, even in the absence of a drought. This third year of drought is unlikely to change the long-term economic outlook for these counties. It will, however, place additional economic pressure on these areas until water supplies return to normal levels

One other eye-opening set of stats from the Moody's report: Even though farm counties have a high proportion of agricultural workers — 28 percent of the workforce in Monterey County, for instance — those workers account for a small share of total wages and salaries — in Monterey County, just 7 percent. That's a pattern that's repeated in the state's other big farm counties, too, where large sectors of the workforce are laboring for a meager share of overall income.

Last: Moody's notes that if the drought continues, all bets are off:

Our analysis in this report reflects the drought to date. If drought conditions continue for another year or two at the same severity, the state’s agriculturally concentrated regions will be highly challenged financially and economically. A persisting drought would make it increasingly difficult for farmers to utilize short-term measures to address water supply issues and could lead to significantly larger losses in farm income and employment. For a city or county with a large agricultural base, a prolonged drought could lead to material revenue losses.