Regional News

Fitch Puts California On Watch

SAN FRANCISCO — California’s deteriorating budget may trigger a downgraded bond rating, according to Fitch Ratings, which placed the state’s A-plus rating on negative watch late Monday.

“The action reflects California’s widening structural budget and cash flow imbalances as the state’s economy slows largely due to the housing slowdown,” the agency said in a news release.

The action affects $43 billion in outstanding general obligation bonds. Fitch also placed $5.9 billion of A-rated appropriation-backed bonds on negative watch.

The action came four days after Gov. Arnold Schwarzenegger unveiled his executive budget proposal for fiscal 2009, in which state finance officials projected weakening revenue trends.

The governor also proposed cuts to a wide variety of state-funded programs and made a formal fiscal emergency declaration, triggering a special session in which he is asking lawmakers to implement cuts in the current fiscal year.

“Rating downgrade would be triggered by the lack of timely action during the emergency session to implement proposed cash conservation or equivalent measures to offset cash shortfalls projected through August, accelerating economic and revenue weakening, extended delays in budget enactment, or the absence of sustainable structural measures incorporated into the final budget,” according to Fitch.

State Controller John Chiang released his office’s latest cash figures Monday, providing further evidence that the state’s budget position is weakening.

“We started the new year with a billion-dollar gap between actual receipts and expectations,” Chiang said in a news release. “Given December’s sluggish performance, the governor’s dismal budget projections, unfortunately, may be on the mark.”

According to the controller, general fund receipts in December were $545 million, or 5.8%, below the estimate in the current state budget.

In a report issued Monday, the state’s nonpartisan Legislative Analyst’s Office said this month will go a long way to determining how the state will finish the budget year.

“January is a huge revenue month — second largest of the year — with $11.6 billion in receipts projected, including $8.3 billion from the personal income tax,” the report said. Fourth-quarter estimated taxes from individuals were due yesterday.

“Historically, the strength in these payments has often been an early indicator of the strength or weakness in final payments that are remitted in April,” the report said.

The state’s weakening cash position led Schwarzenegger to order the issuance of $3.3 billion in deficit bonds. Issuance of the “economic recovery bonds,” slated for February, represents a sea change for the governor, who had been trying to retire the state’s outstanding deficit bonds before his 2011 departure from office.

In recent months, investors have pushed the spread between California GOs and the Thomson Financial Municipal Market Data curve to 60 basis points from about 20 basis points earlier in 2007, according to a Merrill Lynch &Co. report released yesterday.

Because of the fiscal emergency powers Schwarzenegger plans to exercise, Merrill does not foresee a repeat of the state’s budget crisis five years ago, which saw spreads widen to 120 basis points. “While we acknowledge that downside risk remains, the same political and legislative issues that hindered the state five years ago are not factors today,” the report said.

Moody’s Investors Service and Standard & Poor’s both rate California at the A-plus level with stable outlooks, and have not yet responded to the latest budget.

After next month’s deficit bond sale, the next issue on the state Treasurer’s Office bond calendar is a $278 million state Public Works Board offering in March.

The LAO, in its initial evaluation of the governor’s budget Monday, declared its revenue forecast “generally reasonable” though subject to some downside risk, while at the same time criticizing his across-the-board approach to proposing spending cuts.

“We’re not setting state priorities under the governor’s proposal,” legislative analyst Elizabeth Hill told reporters Monday. “We first suggest the Legislature take an approach to identify high-priority and low-priority programs.”


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