By Jim Christie
SAN FRANCISCO Feb 3 The downgrade of $46
billion of California's general obligation bonds by Standard
and Poor's sets the stage for similar actions by Moody's
Investors Service and Fitch Ratings as the state's budget
crisis persists, analysts said on Tuesday.
California and Louisiana had been paired at the bottom of
Wall Street's rankings of state general obligation debt. With
the downgrade by Standard & Poor's Ratings Services late on
Monday, California became the state with the lowest-rated
general obligation bonds.
"It's a red flag," said Christopher Thornberg, an economist
with Beacon Economics in Los Angeles. "What they're responding
to is the fact that the state is running out of cash."
S&P cited the state's weakening finances and slow talks
between Gov. Arnold Schwarzenegger and lawmakers over closing a
budget gap topping $40 billion through this fiscal year and the
fiscal year beginning in July.
The agency cut its rating late on California's GO debt,
which is backed by the state's general fund, to "A" with a
stable outlook from "A+."
The final straw was California's cash shortage. "It just to
us indicated another level of distress in the overall
situation," said S&P director Gabriel Petek.
California's cash account is on the brink of running dry
and the state controller on Monday began withholding tax
refunds to have money for higher priority payments, including
"Rating agencies are very reluctant to downgrade states so
it's a big move," said John Moorlach, an Orange County,
California supervisor. "When S&P says 'We're downgrading' that
should be a signal that things aren't going as they should."
THREATS TO RATING
S&P had warned in December of a possible downgrade, which
puts California, the biggest U.S. issuer of public debt, at
risk of increased borrowing costs and may prompt Wall Street's
two other major rating agencies to follow with downgrades.
Last month Moody's warned it may cut California's GO rating
and Fitch said its GO rating was slated for review.
"The big three rating agencies tend to rate in similar
directions," said James Hawley, co-director of the Elfenworks
Center for the Study of Fiduciary Capitalism at St. Mary's
College of California.
If California borrows to help balance its books its GO
rating could slide to the "Baa/BBB" level, where it stood
during the state's 2004 financial crisis, said Dick Larkin,
director of credit at municipal bond broker Herbert J. Sims.
"They're going to have to ask people to lend them money to
get over this hump," he said. "It's not the kind of thing a
single-A credit does -- issue bonds to pay for this year's
PUSHING BUDGET TALKS FORWARD
S&P's downgrade could have a bracing effect on budget talks
by prodding Schwarzenegger and lawmakers toward measures to
help balance the current and next budgets with spending cuts
opposed by Democrats who control the legislature and revenue
increases through new or higher taxes opposed by Republicans.
"It could add some pressure," Hawley said. "Everyone knew
it was out there, but the stark reality of a downgrade is very
different from the threat."
Schwarzenegger spokesman H.D. Palmer said budget
negotiators aim to address Wall Street's concerns about
California's shortfalls this year and next, the result of
revenues falling harder and faster than expected in the wake of
the crisis in financial markets.
"The goal is to close the entire $41.6 billion gap in one
shot," Palmer said.
S&P in a statement said its lower rating reflects its view
of the state's inability to reach agreement on a midyear budget
revision and the state's rapidly eroding cash position.
A ray of hope for California may come from federal stimulus
funding, S&P said. The most populous state could receive nearly
$8 billion for "fiscal stabilization funding" and nearly $22
billion for other purposes, including public works and health
and social program according to initial estimates, S&P said.