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S&P Drops California To A-Minus

SAN FRANCISCO — Citing California’s “severe” budget imbalance and the likely reappearance of cash-flow problems, Standard & Poor’s Wednesday downgraded the state’s general obligation bond rating to A-minus from A. The agency continues to assign a negative outlook.

The downgrade comes days after Gov. Arnold Schwarzenegger released his budget proposals to close a $19.9 billion general fund gap estimated through June 2011.

Schwarzenegger has come under fire for some of his proposed solutions, including the assumption that the state will receive $6.9 billion in additional federal funds, along with a threat to trigger a series of spending cuts and revenue increases if that money doesn’t come.

“We believe that, relative to the past fiscal year, uncertain assumptions for major portions of the budget-balancing proposal make the state’s credit more susceptible to adverse economic or other developments,” according to the downgrade report prepared by lead analyst Gabriel Petek.

The action affects $63.9 billion of outstanding GO debt.

Standard & Poor’s also downgraded to BBB-plus from A-minus about $7.3 billion of appropriation-backed lease revenue bonds, cut the state’s $2 billion commercial paper program to A-2 from A-1, and lowered to A-minus from A $1.9 billion of Proposition 1A receivables program bonds issued last year by the California Statewide Communities Development Authority.

Standard & Poor’s affirmed its SP-1 short-term rating on California’s $8.8 billion of revenue anticipation notes, explaining that the state should have plenty of coverage for the notes when they mature in May and June.

But California’s cash position in March, and again in July, could be precarious, the agency noted.

“In this environment, the state’s ability and willingness to raise revenues or reduce expenditures through tax increases or program reductions could become integral to maintaining credit quality because a significant delay could result in another episode of cash deficiency for the general fund,” according to Standard & Poor’s.

“We remain concerned that the political process could impede timely solutions,” the rating report said. “The absence of timely action could result in our lowering the GO rating.”

In 2009, California’s weak cash position, combined with drawn-out negotiations in the Legislature over how to deal with the deficit, led the controller’s office to issue $2 billion of IOUs to various creditors in order to preserve cash for priority creditors such as bondholders. The IOUs were eventually repaid.

But the state’s leaders need to act quickly to avoid a repeat, said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

“S&P’s action highlights the critical need for the Legislature and the governor to swiftly solve our budget problem and do it in a way that’s credible in the market,” he said. “S&P makes it pretty clear that the failure to act in a timely manner and the failure to act with believability will threaten us with another downgrade.”

The governor has declared a fiscal emergency and a special session that gives lawmakers a 45-day deadline to address the immediate budget gap.

“If the Legislature acts on the governor’s special session proposals, nearly half that gap could be closed,” said H.D. Palmer, spokesman for Schwarzenegger’s finance department. “Wednesday'’s action underscores the importance of the governor’s call for swift action.”

Despite the downgrade, Standard & Poor’s maintains a higher rating on California than the other two major rating agencies do. Fitch Ratings rates the state BBB and Moody’s Investors Service rates it Baa1.

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