California's Credit Cut Amid Budget Deficit

Wednesday, 13 Jan 2010 09:33 PM

 

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A major credit-rating agency lowered California's debt rating Wednesday, putting pressure on Gov. Arnold Schwarzenegger and lawmakers to start tackling the state's $20 billion deficit.

Standard & Poor's lowered its rating on California's $64 billion general obligation debt one step, from "A" to "A-." The agency also dropped $9.4 billion in lease-revenue bonds three notches, from "A-" to "BBB-."

California already had the lowest general obligation rating of any state when S&P dropped it from "A+" to "A" in February 2009. Fitch and Moody's, two other rating firms, followed with their own downgrades.

Illinois' "A+" rating is the second lowest in the nation, said Gabriel Petek, an analyst for the agency.

The reduced S&P ratings are still investment grade, but they could reduce investor demand for California's debt and raise the cost to taxpayers of borrowing money. Last year, the state treasurer's office estimated that if agencies downgraded $53.3 billion in general obligation bonds to "BBB+," it would increase the state's long-term borrowing costs by $7.5 billion.

"BBB+" is one notch below California's current "A-" rating, and S&P warned Wednesday that the state's rating has a negative outlook, meaning future downgrades are possible.

The ratings agency said California is once again facing cash shortages in March and July, and it questioned some of the governor's budget proposes, including one to cover the low cash period in March with $1 billion in as-yet-undetermined solutions.

The agency worries that Schwarzenegger's proposal to close the deficit relies too much on federal help and underestimates the difficulty of getting voters and lawmakers to agree to his plan.

"We believe that ... uncertain assumptions for major portions of the budget balancing proposal make the state's credit more susceptible to adverse economic or other developments," S&P wrote.

The governor's finance spokesman, H.D. Palmer, said the agency's action underscores the need for the Legislature to act quickly.

"If the Legislature acts on the governor's special session proposals, nearly half of that gap can be closed," Palmer said in a statement. "The governor looks forward to working with the Legislature to start taking the tough but necessary steps to bring our budget back into balance."

General obligation bonds are loans approved by voters and paid back through general taxes. Lease-revenue bonds are used for capital outlay. They don't require voter approval and are paid back by the state departments using the facility.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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