http://latimesblogs.latimes.com/money_co....
S&P warns California's credit rating is at risk of another cut
9:15 AM, June 16, 2009
California's credit rating, already the lowest among the 50 states, may be hacked again, Standard & Poor's warned today.
As the debate over budget cuts drags on in Sacramento, S&P put its "A" grade on the state's $59 billion in general obligation bonds on "negative credit watch," meaning the rating is at risk of a downgrade.
Using language that could further spook bond investors, S&P said, "Although we continue to believe the state retains a fundamental capacity to meet its debt service, insufficient or untimely adoption of budget reforms serve to increase the risk of missed payments in our view."
The Legislature and Gov. Arnold Schwarzenegger are facing a $24-billion budget shortfall, and Controller John Chiang has warned that the state could run short of cash beginning July 28, just one month into fiscal 2010.
Noting that time is running out, S&P warned:
Both the timing and magnitude of the state's impending liquidity shortfall raise significant credit concerns, in our view, particularly if the state were to begin fiscal 2010 without having meaningful budget revisions in place. We believe that without budget revisions, the state may need to defer (or issue registered warrants in lieu of making) cash payments for certain lower-priority obligations (such as vendors, student aid, and tax refunds) in order to preserve cash for required payments for education and debt service.
Were the state to do this, or if it were to adopt a budget package that relied on assumptions that we regard as too optimistic or that relied on mechanisms for bridging the projected shortfall through at least fiscal 2010 that we regard as unreliable, we may consider lower ratings.
Any downgrade could spur investors to force the state to pay even higher interest rates when it borrows. Market yields on California's general obligation bonds already have surged in recent weeks as the prices of the bonds have fallen, reflecting investor jitters.
California and Louisiana had been tied for last place, at "A-plus," on S&P’s state ratings list, until February, when S&P cut the Golden State to "A." Most states are rated either "AA" or "AAA."
S&P's latest downgrade warning also applies to its "A-minus" rating on the state's $8.1 billion of appropriation-backed lease revenue bonds.
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MOODY'S PLACES STATE OF CALIFORNIA'S A2 RATING ON WATCHLIST FOR POSSIBLE DOWNGRADE; LEASE DEBT AND OTHER STATE-BACKED DEBT ALSO ON WATCHLIST
http://www.moodys.com/moodys/cust/resear....
APPROXIMATELY $72 BILLION OF RATED DEBT AFFECTED
Opinion
NEW YORK, Jun 19, 2009 -- Moody's Investors Service has placed the State of California's A2 general obligation rating, as well as the ratings for lease debt and other state-backed debt listed below, on Watchlist for possible downgrade. The Watchlist action reflects the following: 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. Although the executive branch has proposed a package of budgetary and cash measures, thus far no meaningful solutions have come out of the legislature.
In addition, Moody's has placed the Aa3 global scale rating assigned to the California Federally Taxable General Obligation Bonds and Stem Cell Research and Cures Bonds, Series 2007A, and the A2 global scale rating on the California Judgment Trust Certificates of Participation Series 2005 on Watchlist for possible downgrade.
The difficulties the state is facing include the following:
* After enacting a budget for fiscal year 2010 in February, the economy has continued to deteriorate and the state is now expecting budgetary gaps for fiscal year 2010 of over $20 billion.
* Budgetary solutions are more limited now that the voters did not authorize the state to issue deficit bonds secured by lottery revenues.
* Without legislative and executive solutions, the state is expecting to run short of cash beginning in July.
Moody's rating review will take into account many factors, and will focus largely on the legislature's ability to overcome the current stalemate and enact solutions to the state's budgetary and liquidity situation. 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. Lack of action could result in a multi-notch downgrade. If the legislature does take action, we will assess the likely impact of those actions: whether they improve liquidity, whether they improve budgetary balance, whether they provide long-term solutions or quick fixes, and whether we believe the solutions to be viable, to determine whether the actions taken leave the state in a position consistent with the current rating level.
STATE STRENGTHS
o Large, diverse, and wealthy economy; and
o Relatively well funded pension obligation.
STATE CHALLENGES
o Large budgetary shortfalls in fiscal year 2010;
o Impending cash crisis;
o Political intransigence;
o Limited financial and budgetary flexibility; and
o Reliance in past on deficit borrowing to resolve budgetary gaps.
STRUCTURAL ELEMENTS MAKE THE STATE MORE VULNERABLE AT THIS TIME
The State of California is large and diverse. With a Gross State Product of $1.8 trillion, the state is responsible for 13% of US Gross Domestic Product (GDP). By many accounts, if California were a country, it would have the tenth largest economy in the world. But the state is rated lower than most, in part due to the inflexibility and volatility of the revenue system and governmental structure and features.
California has significantly less flexibility relative to other states when it comes to budgeting and revenue raising. Approval by two-thirds of the legislature is required to pass a budget, and to raise revenues. In a year when revenues are underperforming, the governor does not have the power to order spending cuts or to raise revenues without the consent of the legislature. The state does revisions of its revenue forecasts less frequently than many states, giving it less time to catch up to a downturn. The state has initiatives and referenda, which has tied up spending flexibility. Contentious political debates slow state reaction to budgetary stresses. Finally, voter approval is required to issue general obligation bonds or deficit bonds.
In addition, California has a higher level of economic and revenue volatility relative to other states. The state has a highly progressive personal income tax structure where the wealthiest 3% of state taxpayers pay approximately 60% of all state taxes. The state is also highly dependent on capital gains and the exercise of stock options by taxpayers resulting in strong revenue performance in upswings, while downturns affect them quickly and deeply.
This limited flexibility is incorporated in the state's relatively low rating, but in times of extreme stress, like the present, the state is in a much more vulnerable position than states that do not have the same level of inflexibility.
At the same time, it is important to note that the state has many tools available to it, as all states do, that make it strong compared to most municipal credits. The likelihood of bond repayment is very high, because general obligation debt service comes second in the state's hierarchy of priority payments. The state has already put aside sufficient funds to pay the notes coming due at the end of June. The state has the ability, if it has the willingness, to make expenditure cuts and raise taxes to increase revenues when times are difficult, and to borrow cash from other funds to ease cash-flow difficulties. Further, the state has the ability to transfer some of its problems to lower levels of government, through cuts or through borrowing some of their tax revenues.
STATE BUDGET AND CASH SITUATION
The state's budget for fiscal year 2008-09, which was passed more than two months late on September 23, 2008 reflected zero growth in General Fund spending from 2008 to 2009 (General Fund spending of approximately $103 billion). The budget relied heavily on one-time solutions. When September revenue collections came in below estimates, the state revised its revenue estimates for the year. A balanced budget for 2009 in September quickly became a budgetary shortfall of $11.2 billion in November, and then $14.8 billion in December. This projected shortfall was expected in General Fund revenues versus expected General Fund spending, and represented 15% of General Fund operating revenues (the General Fund is the primary state fund for operating purposes). The gap for fiscal year 2010 was projected at $25 billion (or 25% of revenues).
On February 20, 2009, the governor signed the 2009 Budget Act and related legislation. The package of bills addressed the budget gap through expenditure reductions and revenue increases, as well as one-time revenues and long-term borrowing, some of which required voter approval at a special statewide election held on May 19, 2009. The budget also assumed $8.5 billion received in federal stimulus aid.
In the special election on May 19, voters did not authorize the state to issue deficit borrowing, which brought the state's budget out of balance by $5 billion. In addition, state tax revenues have come in far below forecast in each month since the budget was passed. As a result, fiscal 2010 budget gaps are now estimated at over $20 billion. The state controller has announced that without action by the legislature, the state will run out of cash in July. The governor has proposed a package of cuts to the legislature, but the legislature has not enacted anything yet.
In addition to the state's $57 billion of state general obligation bonds outstanding, the Watchlist action affects almost $6 billion of lease revenue bonds, and under $4 billion of other government bond programs directly or indirectly linked to the general creditworthiness of the state. A list of affected ratings on the municipal scale is below, followed by a list of affected ratings on the global scale.
LIST OF AFFECTED RATINGS-MUNICIPAL SCALE
AFFECTED RATINGS-Currently rated A2
* State of California, General Obligation Bonds
* State of California, Veterans General Obligation Bonds
AFFECTED RATINGS-Currently rated A3
* East Bay Building Authority, Certificates of Participation
* California State Public Works Board, Lease Revenue Debt
* Golden State Tobacco Securitization Corp., Tobacco Settlement Asset Backed Bonds
* California debt backed by state appropriation
* California Infrastructure and Economic Development Bank, State School Fund Apportionment Lease Revenue Bonds
AFFECTED RATINGS-Currently rated Baa1
* Bay Area Infrastructure Financing Authority, State Payment Acceleration Notes
* California Judgment Trust Obligations Certificates of Participation
LIST OF AFFECTED RATINGS-GLOBAL SCALE
AFFECTED RATINGS-Currently rated Aa3
* California Federally Taxable General Obligation Bonds
* Stem Cell Research and Cures Bonds, Series 2007A
AFFECTED RATINGS-Currently rated A2
* California Judgment Trust Certificates of Participation Series 2005
MOST RECENT RATING ACTION AND PRINCIPAL METHODOLOGY
The last rating action with respect to the State of California was on April 15, 2009, when the rating of A2 with a stable outlook was assigned to the State of California Various Purpose General Obligation Bonds (Federally Taxable). The last rating action with respect to global scale ratings for the State of California was on March 20, 2009, when the global scale rating on the State of California Taxable General Obligation Bonds (Federally Taxable) and the Stem Cell Research and Cures Bonds, Series 2007A was downgraded to Aa3 from Aa2 and the global scale rating on the California Judgment Trust Certificates of Participation Series 2005 was downgraded to A2 from A1.
The principal methodology used for this rating action was "State Rating Methodology", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Credit Policy & Methodologies directory.
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There goes the MUNI market. Was there ever an alphabet program established by the FED/TREASURY/GS to save the MUNI market?
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They would never have the balls to give us a real rating on them....
Once they default maybe they would lower the rating one more notch...
Look at how many companies were sporting AAA ratings well after the fact of their demise...
Why the **** are ratings agencies incapable of declaring what a rating is when they downgrade?
Either CA is an A rating, or it is an A-.
They are incapable of declaring simple, obvious, truths.
CA is 5 WEEKS from shutdown, and they have an A rating.
This whole attitude of obliquity in American Corporate Culture is ****ing me off. Get to the ****ing point and stop the weasel wording.
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Hell, why don't they just borrow money from someone to BUY Moody's and give themselves a AAAAAA++++++ rating so they can borrow all the wealth ever created in the universe to give the prison guards even better pensions. After all they're in a union and union workers are the very best. Or something like that. I heard it in a GM commercial so it can't be bull**** right?
RIGHT??? Union workers are the best RIGHT?
They wouldn't lie to us would they???
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Just said on the news that Cali has the highest unemployment rate in modern history. 11.5%!!!
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Why do they always say "may." Usually they don't follow up and actually cut the ratings, which would force many institutional holders to react. Maybe they feel they've done their duty to the public by saying "may."
Maybe they could pass a referendum to raise their own rating, instead of bribing Moody's.
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50% tax revenue falls might have something to do with this :)
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Those 10 month GO bonds are coming due soon....
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