SAN FRANCISCO — Moody’s Investors Service yesterday released a special comment on California, following the state’s adoption of budget revisions.
The agency said it will “continue to evaluate” the state’s Baa1 rating, and noted that the details of the budget deal are likely to affect lower tiers of government in the state, particularly redevelopment agencies.
On Tuesday, after weeks of debate and negotiations with lawmakers, Gov. Arnold Schwarzenegger signed bills to enact $24.2 billion in budget revisions, including $16.1 billion in cuts and another $8 billion in fund shifts, interfund loans, and timing shifts, such as moving the state’s final fiscal 2010 payroll back one day to fiscal 2011.
In analyzing the agreement, “its impact on the liquidity situation is as yet unknown, and its reliance on one-time revenues, accounting shifts, and borrowing and expenditure cuts that need to be repaid will leave the state poorly positioned for budgetary balance in future years,” said the Moody’s analysis.
“As more details emerge, we will continue to evaluate the potential credit implications for the state’s Baa1 GO rating, as well as the other state’s related ratings,” Moody’s wrote.
In addition to Moody’s Baa1 rating, California GOs have ratings of BBB from Fitch Ratings and A from Standard & Poor’s.
In addition to a structural deficit, California’s government was also facing a liquidity crunch, and it is not yet clear what effect the recent budget actions will have on that crunch, according to Moody’s.
“Now that the state has a balanced budget for fiscal year 2010, it is likely that the state will move quickly toward a short-term cash-flow borrowing, thus improving the current cash crisis as well,” according to the Moody’s comment. “The impact of this on the state’s credit is unknown at this time, as the potential size or form of this borrowing is still unknown. A very large cash-flow borrowing, or one that stretches across fiscal years, could place additional stress on the state’s cash position at the end of this fiscal year or next year.”
Anticipating the cash crunch, the state controller’s office on July 2 began paying many creditors with IOUs, in order to preserve cash for creditors who have legal or constitutional priority, such as bondholders.
Through Wednesday, the controller’s office has issued more than 228,000 registered warrants, as the IOUs are formally known, for more than $1.15 billion, according to spokeswoman Hallye Jordan.
Controller John Chiang has said he must evaluate the cash-flow results of the recent budget deal before he ceases issuing the IOUs.
The state may have to defend those IOUs in court, as a law firm that specializes in class action cases announced Thursday it has filed a federal suit that it plans to convert into a class action on behalf of state vendors paid with IOUs. The lawyer who brought the case, William Audet of Audet & Partners LLP, did not respond to a request for comment.
It is not likely to be the only lawsuit driven by the state budget; California’s redevelopment agencies, which stand to lose more than $2 billion as part of a budgetary fund shift, have announced they plan to challenge that shift in court on state constitutional grounds.
Cities, counties, and school districts all stand to lose money as a result of cuts in the state budget, but most governments saw what was coming and have been able to start preparing for it, according to Moody’s, with one exception: the shift from redevelopment.
“This is of a substantially greater magnitude than might have been anticipated, and it could have a material impact on some redevelopment agencies’ overall credit quality,” Moody’s said. “Aside from the redevelopment impact, most local governments had prepared for further cuts from the state.”
