SAN FRANCISCO — Fitch Ratings downgraded $8.7 billion of California economic recovery bonds to A-plus from AA-minus late Friday afternoon.
Fitch also put the sales-tax backed debt on negative rating watch. The bonds, sold to finance state deficits in 2004 and 2008, have been now been downgraded and placed on negative watch by all three major credit rating agencies.
The downgrade “is due to the sharp erosion of sales tax collections to date and the likelihood of continued economic and revenue weakening,” Fitch said in a release.
California’s economy is slowing dramatically, and state lawmakers have been unable to agree on solutions to a two-year, $40 billion gap in the $100 billion annual general fund budget. California’s unemployment rate surged to 9.3% in December from 8.4% in November and 5.9% a year earlier, the state Economic Development Department said Friday. That rate is more than two percentage points above the 7.2% national rate.
Fitch was the last of the three credit agencies to cut the ERB ratings. Standard & Poor’s downgraded the economic recovery bonds to AA from AA-plus in December, and Moody’s Investors Service cut its rating to A1 from Aa3 earlier this week.
The three agencies have also put the state’s A1 and A-plus general obligation bond ratings on negative watch. Fitch was the first agency to cut the GO rating, moving last January.
“Sales tax collections have seen unprecedented erosion during the current economic downturn, reducing previously adequate debt service coverage on the [economic recovery] bonds,” Fitch said.
The debt is backed by a quarter-cent state sales tax. The state estimates that taxable sales fell 4.5% in 2008 and will fall another 6% this year, Fitch said. Previously, the worst year in the four decades on record was 2002, when sales fell 2.3%.
“Given that the state’s economic forecast was developed in November 2008, Fitch believes that continued economic weakening will prompt further downward forecast revisions,” the agency said.
State Controller John Chiang has said he expects California to face a cash-flow crisis as soon as next month, when the amount of state bills coming due will exceed available cash. He said the state will withhold tax refunds and other non-priority payments to meet constitutionally required debt service and education payments.
California lawmakers have been negotiating to solve the budget crisis since early November, but Republicans and Democrats have not been able to agree to a package of tax hikes or spending cuts that would balance the budget.
Republicans in the Legislature do not want to raise taxes, while GOP Gov. Arnold Schwarzenegger and legislative Democrats want to impose both deep spending cuts and sharp tax increases to balance the budget. The state constitution requires a two-thirds supermajority to pass tax increases.