Fitch Downgrades California GO Bonds to A-Minus

SAN FRANCISCO — Fitch Ratings Thursday downgraded California’s general obligation bonds to A-minus from A, as the state’s budget crisis continued to play out amid legislative negotiations and gubernatorial veto threats.

The downgrade “is based on the magnitude of the state’s financial and institutional challenges and persistent economic and revenue weakening,” according to a news release from Fitch, which also placed the credit on negative watch. Previously, it had assigned a negative outlook.

“The placement of the state’s bonds on Rating Watch Negative reflects short-term concerns about the state’s ability to achieve a timely solution to the liquidity crisis,” the Fitch release said.

That pending liquidity crisis — with the state controller announcing plans to begin issuing IOUs to lower-priority creditors by Thursday — was at the center of legislative machinations yesterday.

California is facing a $24 billion budget gap for the fiscal year that starts ­Wednesday, and the threat of a negative cash balance as soon as late July without budget action.

The Democratic majority’s plan to close the budget gap failed in both houses Wednesday.

After Controller John Chiang announced that he would begin issuing registered warrants, or IOUs, next week in lieu of cash payments to some creditors, Assembly leaders reportedly negotiated a temporary plan yesterday to delay the cash crunch.

According to published reports, the Assembly package, which cleared the two-thirds threshold, would delay payments to school districts and other agencies that were scheduled in July, thereby buying some weeks before California faces a liquidity crunch.

The Senate had not acted at press time, but was expected to follow suit, according to a Sacramento Bee report.

Gov. Arnold Schwarzenegger quickly issued a news release threatening to veto the plan.

“Since the first day we began working to solve this $24 billion deficit, I have been clear: the Legislature must solve the entire deficit, must make the hard decisions now, and must not ask California taxpayers to foot the bill,” he said. “The current proposal in the Legislature amounts to nothing more than a piecemeal proposal.”

Chiang and state Treasurer Bill Lockyer issued a joint statement urging lawmakers and the governor to approve the deferral package.

“There is no need to hold these measures hostage pending a full budget settlement. Their enactment is inevitable, and quick approval of these payment deferrals and reductions will provide sufficient cash to avoid issuing IOUs starting July 2,” the statement said. “If the state is forced to issue IOUs instead of paying its bills on time, the consequences will be immediate and long lasting. It will greatly increase the cost and difficulty of completing essential cash-flow borrowing in the next few months.  And it will undermine, perhaps for years, California’s ability to sell its long-term general obligation bonds.”

Chiang’s plan called for issuing the registered warrants to lower-priority creditors — including local governments, private vendors, and taxpayers owed refunds — to protect cash for obligations with constitutional and legal priority, including K-12 schools, debt service, and the state payroll.

The plan would probably be a mixed blessing for local governments, according to a statement from Paul McIntosh, executive director of the California State Association of Counties.

Registered warrants would pay interest and would be redeemed in October, assuming the state has enough money to redeem them. The state last issued them in 1992, and they were accepted at most banks.

“In terms of impacts to counties, it appears that registered warrants are a preferable option to delaying payments outright,” McIntosh said. “There is at least the potential that banks or other lenders will cash these warrants in anticipation of receiving the interest earnings when the warrants mature.”

McIntosh added that state law authorized local agencies to issue their own registered warrants.

The Fitch downgrade puts California’s ratings one notch below the A-level ratings assigned by Moody’s Investors Service and Standard & Poor’s. Both have the state on negative watch.

Fitch also dropped California appropriation bonds to BBB-plus with a negative watch.

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