Alert January 28, 2010

S&P Downgrades Cash-Strapped California…Again

In a move not expected to significantly affect the current municipal bond market, Standard & Poor’s recently downgraded California’s general obligation debt from “A” to “A-.”  California already had the lowest credit rating of any state in the union, and analysts do not believe that this latest downgrade will have a significant impact on California’s ability to sell its debt in the short run.

California faces a $20 billion budget deficit over the next 18 months.  Tom Dresslar, spokesman for State Treasurer Bill Lockyer, said that the recent S&P downgrade “highlights the critical need for the legislature and the governor to produce a swift budget resolution that is credible to the market.”  In fact, Governor Schwarzenegger recently proposed a plan to rectify the state’s impending $20 billion deficit through a combination of federal bail-out requests and steep cuts in spending for social services, health care, education, environmental programs, mass transit, and state employment.  The Governor warned that the current crisis will not only require his admittedly draconian cuts, but likely will also require another round of IOUs.  If enacted, the Governor’s proposed cuts are expected to spur additional litigation.