SAN FRANCISCO — Moody’s Investors Service, citing California’s litany of budget problems, this morning placed the state’s A2 general obligation bond rating on watchlist for possible downgrade.
All three rating agencies have California at the ‘A’ level, lowest of any state, and with Moody’s action this morning, all three have put the state on a form of negative outlook within the last three weeks.
“The watchlist action reflects the following,” according to the Moody’s news release. “An expected budget gap of over $20 billion (or more than 20% of the state’s general fund budget) in the state’s fiscal year 2010 budget; the announcements by the state controller that without solutions the state will not be able to meet all its financial obligations in July; the continued political stalemate that has resulted in inaction by the Legislature thus far; and the limited solutions available to the state.”
Citing “political intransigence” as one of California’s challenges, Moody’s said that the fate of the state’s credit rating lies mainly in the hands of its Legislature.
Republican Gov. Arnold Schwarzenegger has proposed a series of actions to close the predicted budget gaps, and the Democrats who control the Legislature have responded with their own proposals, which contain fewer cuts and some tax increases that the governor said he’s prepared to veto, assuming they somehow garner the GOP votes needed to secure passage with the required two-thirds majority.
“If the Legislature does not take action quickly, the state’s cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July,” according to Moody’s. “Lack of action could result in a multi-notch downgrade.”
If lawmakers do act, Moody’s said it would review those actions for viability, improvement to liquidity, and long-term sustainability to determine if they are consistent with a continued A2 rating.
The watchlist action affects $72 billion in outstanding debt, including A3-rated lease revenue bonds, certificates of participation, and appropriation-backed debt; Baa1-rated Bay Area Infrastructure Financing Authority state payment acceleration notes and California judgment trust obligations; and the Aa3 global scale ratings of some taxable state GO bonds.