SAN FRANCISCO - California's ongoing budget crisis was punctuated yesterday with a downgrade, as Standard & Poor's dropped its rating on $46 billion of outstanding general obligation debt to A from A-plus.
The action formally makes California the lowest of the low among state governments in the view of Standard & Poor's, one notch below Louisiana.
"The lowered rating reflects our view of the state's inability to reach an agreement on a mid-year budget revision and its rapidly eroding cash position," analyst Gabriel Petek said in a statement.
State officials say they are facing a combined budget shortfall in excess of $40 billion for the combined 2009 and 2010 fiscal years. Furthermore, California's cash position is so bad that Controller John Chiang has begun suspending several categories of state payments - including income tax refunds - to preserve cash-flow resources for constitutional priority payments, including debt service.
Gov. Arnold Schwarzenegger and legislative leaders have been negotiating for weeks over a package of budget cuts and tax hikes to resolve the shortfall, with nothing to show for it as of yesterday. Such a package requires approval from difficult-to-obtain supermajorities in each house of the Legislature.
"Given our current circumstances this action is unfortunate but not unexpected," said Schwarzenegger spokesman H.D. Palmer, adding that the downgrade underscores the importance of reaching a budget agreement.
California Treasurer Bill Lockyer has been a vocal critic of the standards of the rating agencies, and his spokesman, Tom Dresslar, was dismissive of the downgrade. While the structural shortcomings of the state government contributed to the budget crisis, the ongoing economic meltdown is an even larger factor, he said.
"Given their failings on a chronic basis, whether it's creating the bubble that blew up in everybody's faces last year, going back to the Enron accounting scandals, you have to wonder how much credibility investors should render Standard & Poor's or any of the other agencies," Dresslar said.
"For California to get punished by a ratings agency that helped put us where we are is tough to take," he said.
Moody's Investors Service placed its A1 rating for California GOs on watch list for possible downgrade in January. Fitch Ratings placed its A-plus rating on rating watch negative more than a year ago.
The Standard & Poor's downgrade of the state's GO bonds came a day after Fitch Ratings dropped its short-term rating on $5 billion in California revenue anticipation notes to F2 from F1. That action, citing "severe erosion of state revenues and cash resources since note issuance," brought Fitch into alignment with Standard & Poor's and Moody's on the Rans, which are scheduled to mature in May and June.
All this happened before, and it all will happen again, according to Herbert J. Sims & Co. analyst Dick Larkin, who started tracking California's credit as a rating agency analyst in the late 1970s.
The state is unlikely to close its projected shortfall without a sizable long-term deficit borrowing, just as it needed in 2003 in its last fiscal crisis, Larkin said in an e-mail.
"The deficits California now faces are much larger, and likely much too large to address with tax hikes and spending cuts alone. Add to that the current cash crisis and need for short-term borrowing just to get through the rest of this year, and the municipal bond market's current fragile nature, and the situation begs for further rating downgrade action," Larkin said, projecting downgrades to the triple-B level, as was the case in 2003 and 2004.
The state's precarious budget position, as well as the troubled state of the market in general, has prevented California from issuing new general obligation bonds since June, though the state treasurer's office had planned to issue $11 billion in new-money GOs for the fiscal year that started July 1, according to its annual debt affordability report. California issued $7.35 billion in new-money GOs in the year ending June 30, according to the report.
In December, the state's Pooled Money Investment Board cut more than $3 billion in planned infrastructure funding that was to have been reimbursed with bond proceeds.