Standard & Poor's Ratimg Services has placed California's credit rating, already the lowest among the states, on a watch list "with negative implications" due to the state's chronic and unresolved budget deficit.
The credit watch notification on general obligation and lease-revenue bonds reflects "our
assessment of the state's projected depletion of cash by the end of July 2009 absent the adoption of a significant revision to the fiscal 2010 budget," S&P said in a statement.
"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 notice continued.
The action affects approximately $59 billion of GO debt and $8.1 billion
of appropriation debt. "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."
S&P's warning was issued as Gov. Arnold Schwarzenegger and legislative leaders enter an intensive phase of negotiations over how to close a 2009-10 budget deficit estimated as high as $24 billion, including the governor's proposed $4.5 billion reserve.
Schwarzenegger has proposed sharp cuts, especially in education and health and welfare programs, while Democratic leaders want to ease the cuts with some new taxes.
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