Alert July 10, 2009

Another Rating Downgrade for California

Fitch Ratings recently downgraded California’s general obligation bonds from A-minus to BBB, and lowered its rating on the State’s lease-backed debt to BBB-minus, the lowest investment grade rating. Fitch also put California’s bonds on a negative watch, indicating that it may lower the State’s lease-backed debt to junk status if California Legislators cannot solve the State’s current budget crisis. Standard & Poor’s recently reaffirmed its A rating, and Moody’s Investors Service maintains its A2 rating, on California’s general obligation bonds. Both agencies continue a negative watch on California debt.

In a press release regarding the drop in ratings, Fitch noted that “the downgrade to BBB [for California’s general obligation bonds] is based on the state’s continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis.”  Last week, State Controller John Chiang highlighted that inability by issuing IOUs to California vendors when lawmakers failed to reach a budget agreement by the end of the 2008-09 fiscal year.

California’s budget woes are no secret. Democrats, who hold a majority in the Legislature, continue to reject all proposals that might damage the State’s social safety net, while Republicans decry any attempt to raise taxes. Meanwhile, local agencies wince with each new committee proposal that seeks to recapture local revenues, such as gas taxes or tax increment, to help solve the State’s financial predicament.