SAN FRANCISCO — While California’s political leaders continued negotiating without finding a solution to the current budget deficit, Standard & Poor’s yesterday downgraded the bonds the state issued to close its last major budget deficit.
The rating agency dropped its underlying rating for the state’s economic recovery bonds to A from A-plus, and placed them on watch for downgrade. The action brings its ratings on the economic recovery bonds down to the same level as the state’s general obligation bonds.
The ERBs, first issued in 2004 to resolve the state’s last major budget crisis, carry the double-barreled backing of a dedicated quarter-cent sales tax and the state’s GO pledge.
That dedicated sales tax originally earned the ERBs higher ratings than the GOs; Standard & Poor’s has rated them as high as AA-plus during a period when it never rated state GOs higher than A-plus.
But California’s declining sales tax receipts mean the credit quality of the sales tax pledge is now inferior to that of the GO pledge, according to Standard & Poor’s.
Sales tax revenue collections for the first six months of 2009 were down 17% compared to the same period a year earlier.
“However, we note that [the] state’s GO rating and our view of the credit quality of the state’s sales tax revenues may not move in tandem,” the agency said in a release.
As a credit positive, Standard & Poor’s noted that sales tax collections for the ERBs are segregated from the state’s general fund and its woes.
“Should recovery commence, we believe the ERBs’ performance could improve relatively quickly due to the bonds’ structure, which, if certified revenue projections are sufficient, includes advance retirement of principal, thereby lowering future debt service obligations,” the agency said.
Standard & Poor’s also lowered the short-term rating on variable-rate ERBs to A1 from A1-plus. The actions affect $8.63 billion of outstanding bonds, including $2.99 billion of variable-rate debt.
The other two major rating agencies had already dropped their long-term ratings on the ERBs to parity with the state’s GO rating — BBB for Fitch Ratings and Baa1 for Moody’s Investors Service.
Fitch and Moody’s yesterday downgraded their short-term ratings on the variable-rate ERBs to F2 with a negative watch and VMIG-3, respectively.
In both December and June, California released a material event notice indicating that it had accessed its reserve fund to make ERB principal payments. In the June notice, the treasurer’s office said it planned to restructure the ERBs.
Such a restructuring would first require access to the markets, which will depend on the state’s ability to bring back into balance a projected $26 billion budget deficit.
After an optimistic start to negotiations Wednesday, talks between Gov. Arnold Schwarzenegger and the top four legislative leaders ended broke up without a deal.
“After a long day of negotiation, I have to say we’ve stalled,” Assembly Speaker Karen Bass, D-Los Angeles, told reporters. “I hate to describe it as a step back, but it is a stall.”
Senate president pro tempore Darrell Steinberg, D-Sacramento, said the impasse stems from his party’s insistence on including a formula to restore money to K-12 education in future years.
As of midday yesterday, new talks had not been announced.
In a statement yesterday, Treasurer Bill Lockyer warned that a deal for a balanced budget is needed quickly, because without one the state is close to getting downgraded to junk-bond levels.
