(Adds comments by Assembly speaker, finance department)
By Jim Christie
SAN FRANCISCO, July 6 California suffered a new
setback in its financial crisis on Monday when Fitch Ratings
cut its rating on the state's general obligation debt to just
two notches above junk status.
Fitch cut its rating on California's long-term bonds to
"BBB," two notches above speculative grade, citing the state's
budget and revenue crisis.
The state last week started issuing "IOU" promissory notes
for some bills to conserve cash for priority payments,
including payments to investors holding the state's debt.
The rating agency also kept the debt of the most populous
U.S. state on watch for additional downgrades. California ranks
as the lowest-rated state general obligation credit by Fitch,
followed by Louisiana, at "A+."
Tom Dresslar, a spokesman for State Treasurer Bill Lockyer,
said the other two main credit rating agencies, Standard &
Poor's and Moody's Investors Service, could soon follow Fitch's
example. "I'm sure their patience is not deep," he said.
Lower ratings could raise California's borrowing costs during
a severe cash crunch in Sacramento, the state capital, where talks
between Governor Arnold Schwarzenegger and lawmakers to plug a
$26.3 billion budget deficit for the fiscal year that began on
July 1 are plodding along.
"If we're forced to pay tens of millions of dollars, if not
hundreds of millions of dollars, in higher interest costs
because we have a delayed budget, that's tantamount to lighting
money on fire," said H.D. Palmer, a spokesman for the state's
Department of Finance. "That's money that we could be spending
on things like health care or education."
Standard & Poor's has California's general obligation bonds
rated "A" with CreditWatch with negative implications. Moody's
has warned of a possible "multi-notch" downgrade in its "A2,"
sixth-highest investment grade credit rating of California's
general obligation debt.
In a statement, Fitch said it cut its "A-" rating due to
the state's "inability to achieve timely agreement on budgetary
and cash flow solutions to its severe fiscal crisis."
FITCH EYES CALIFORNIA'S CASH
Schwarzenegger seized on the Fitch downgrade to criticize
state Assembly Speaker Karen Bass for not meeting for budget
talks earlier in the day.
"This underscores the urgency to solve our entire deficit,"
he said in a statement. "This is not the time for boycotting
budget meetings -- all sides must come to the table and balance
the budget immediately."
Bass told reporters it was Schwarzenegger who was holding
up budget talks by pushing to include overhauls of state
government in negotiations: "The issue of reforms, I think are
critical, but we can begin the reform process the day after the
budget revision is signed."
Fitch said its "BBB" rating indicates "expectations of
default risk remain low, although the rating is well below that
of most other tax supported issuers."
The ratings agency said California needs a balanced budget
agreement quickly because it will need to sell short-term debt
for cash-flow purposes once it has a spending plan.
Fitch analyst Douglas Offerman said the rating agency is
keeping a close eye on how California manages its cash, sharply
reduced as revenues have plunged amid recession, rising
unemployment and a prolonged housing slump.
California is experiencing the worst drop in revenues from
personal income taxes since the Great Depression.
"The (state) controller having to issue IOUs is one thing,
but the controller's own projection is that the state's
projected cash position in the fall gets dramatically worse
without a resolution to the budget," Offerman told Reuters.
"That raises the urgency to developing a budget solution
that is going to address the cash-flow problem the state has in
a responsible way," he said.
Questions have arisen whether California's tax-exempt IOUs
can be bought, sold and traded.
The Securities and Exchange Commission must first determine if
the IOUs are securities to regulate them, said Ernesto Lanza,
general counsel to the Municipal Securities Rulemaking Board,
adding that the board was not working directly with the commission
on that decision.
"It looks like it has all the hallmarks of a security,"
Lanza said. "If they are securities, I think they're pretty
clearly municipal securities."
Fitch's downgrade was seen having little effect Tuesday on
the municipal debt market. "I don't see any huge negative
reaction, it's priced in," said Parker Colvin, head of
municipal securities trading at Stone & Youngberg in San
(Additional reporting by Marianne Russ in Sacramento,
California, and Lisa Lambert in Washington; Editing by Phil