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California General Obligations on Watch

SAN FRANCISCO - The deadline pressures for California's leaders to bring the state's general fund budget into balance were further emphasized Friday when Moody's Investors Service placed the state's A2 general obligation bond rating on watch list for possible downgrade.

Lawmakers have been debating their response to Gov. Arnold Schwarzenegger's proposals to close a $24 billion budget gap in the face of a potential liquidity crisis.

The Republican governor and the state's top elected financial officials, Treasurer Bill Lockyer and Controller John Chiang, both Democrats, have all warned that budget solutions need to be in place by the end of the month to avoid a cash shortfall that would emerge before the end of July.

In its report Friday, Moody's warned that if a failure to take quick budget action forces the state to delay some of its payments in July, a multi-notch downgrade could result.

The A2-level rating is already Moody's lowest for any state. Moody's action Friday brought the agency into alignment with Standard & Poor's and Fitch Ratings, which had put their A-level ratings on negative watch or outlook during the previous three weeks.

Chiang has said that, without budget action, the state would have a negative cash balance of almost $3 billion on July 28, forcing it to delay scheduled payments for lower-priority recipients to preserve cash for higher priorities like debt service.

To avoid that fate, the state needs to complete a cash-flow borrowing before then, which is why it's imperative to have a budget in place before July 1, said Tom Dresslar, spokesman for Lockyer.

Lockyer is trying to put together a revenue anticipation note deal to allow the state to manage those cash-flow needs, but it will require enough lead time to close by July 28.

"We have to get the prospectus done, and meet other logistical requirements, and what we need is roughly a three- to four-week period to put a Ran deal together," Dresslar said Friday.

"We can't have July 4 fireworks in this building," Lockyer told members of the Legislature's budget conference committee in late May.

That appearance was one of several warnings Lockyer has issued to lawmakers telling them that California's budget for fiscal 2010 needs to be brought into balance in order to persuade investors that the state can redeem Rans at the end of the year.

"The only real solution is old-fashioned budget balance, with revenues and expenditures being in line," Lockyer told the conference committee.

At the time, Lockyer told the committee that U.S. officials had told him they were unlikely to provide any backstop or support for the state's cash borrowing needs, as California officials had requested.

President Obama's spokesman, Robert Gibbs, reiterated the point last week at a White House press briefing.

"It's obviously not an easy time for the state of California," he said. "We'll continue to monitor the challenges that they have. But this budgetary problem, unfortunately, is one that they're going to have to solve."

Moody's in its report Friday cited "political intransigence" as one of the state's challenges, saying the fate of the state's credit rating lies mainly in the hands of its Legislature.

If budget solutions are adopted in a timely manner, Moody's said it would evaluate whether they are effective enough for California to retain an A2 rating.

Schwarzenegger has proposed a series of actions to close the state's predicted $24 billion budget gap, and the Democrats who control the Legislature have responded with their own proposals, which contain fewer cuts and some tax increases that the governor said he'd veto, if they manage to pass.

The Democratic leadership has promised votes on the budget package by early this week and said it would reach balance with or without tax hikes.

Dresslar responded to Moody's action by saying the agency is way off base in trying to tie the state's long-term rating to its short-term cash management issues.

"The key word in that document is opinion and as has been shown time and again in recent decades, Moody's opinion is worth squat," he said. "We've never defaulted on a debt service payment. We will not default on a debt service payment."

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