Citing California's failure to pass a timely budget agreement and its new reliance on IOUs, Fitch Ratings on Monday downgraded the state's long-term bond rating to BBB from A-.
The downgrade potentially increases California's borrowing costs for public works projects and serves as another benchmark of the state's deteriorating fiscal condition.
The state retained its investment-grade status because Fitch said "expectations of default risk remain low." But Fitch kept the state's general obligation bonds on a "negative" watch and noted that the state's rating is "well below that of most other tax supported issuers."
"The downgrade to BBB is based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis," Fitch said in a statement. "Since no agreement was reached by the June 30, 2009 fiscal year (FY) end, the state's controller has now begun issuing registered warrants (IOUs) for certain non-priority payments to preserve cash, and the budget gap to be addressed has increased to $26.3 billion from $24.3 billion."
Fitch noted that California can offset its cash problem with IOUs into September, but thereafter the state's cash deficits "will expand dramatically."
State Treasurer Bill Lockyer last week warned that a rating downgrade to BBB+ -- one grade higher than California's new BBB -- could result in an estimated $7.5 billion in interest costs over a 30-year period. California last had a BBB rating between December 2003 and September 2004, when the state grappled with a significant budget deficit.
Lockyer spokesman Tom Dresslar said that California will pay higher costs the next time it tries to borrow money for public works projects. He said he the state could be saddled with a lower credit rating for some time.
"The last time we got downgraded in this type of environment when we issued IOUs, it took years to recover," Dresslar said. "So even when we adopt a budget solution, our rating probably won't go up magically overnight."
Since last Tuesday's fiscal year end, Democratic Assembly Speaker Karen Bass, D-Los Angeles, has pinned the state's fiscal consequences on Gov. Arnold Schwarzenegger. She blamed him for blocking a bipartisan Assembly stopgap agreement that would have avoided IOUs and might have delayed Monday's rating downgrade.
But Schwarzenegger blamed lawmakers for not reaching a budget agreement for the state's entire deficit, which was $24.3 billion before growing last week by $2 billion more after the stopgap plan failed. He took particular aim at Bass for boycotting his meeting with the three other legislative leaders earlier Monday.
"This underscores the urgency to solve our entire deficit with the necessary cuts instead of kicking the can down the alley," Schwarzenegger 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."
Call The Bee's Kevin Yamamura, (916) 326-5548.
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