Citing serious risks in Gov. Arnold Schwarzenegger's budget plan, Standard & Poor's on Wednesday downgraded California's national-low credit rating from "A" to "A-minus."
The ratings house sees a gloomier picture this year for California's finances because "the state's options have narrowed considerably" and Schwarzenegger has made risky calculations in his latest budget plan to bridge a $19.9 billion deficit.
"We believe that, relative to the past fiscal year, uncertain assumptions for major portions of the budget balancing proposal make the state's credit more susceptible to adverse economic or other developments," Standard & Poor's wrote.
S&P cited the governor's reliance on "extraordinary federal cooperation" and voter approval of $1 billion in transfers from mental health and child development funds as risky assumptions. It also said the unlikelihood of the Legislature reaching a quick deal on "deep cuts as proposed" could hinder the state's finances.
Ratings downgrades can increase the state's borrowing costs for public works bonds and other cash needs.
Much of the S&P downgrade report echoed parts of the nonpartisan Legislative Analyst's Office review issued Wednesday. The LAO deemed the governor's assumption of $6.9 billion in new federal funds as unlikely and said the state would be more likely to receive $3 billion.
S&P downgraded California's general obligation bond rating once last year. Fitch Ratings downgraded the state's rating three times, while Moody's Investors Service downgraded it twice.
Schwarzenegger has declared a fiscal emergency and called lawmakers into special session. Both houses are holding their first budget hearings this week.
Spokesmen for state Treasurer Bill Lockyer and the Department of Finance issued statements urging the Legislature to move quickly on the budget.
"Today's action underscores the importance of the governor's call for swift action by the Legislature to start closing our $20 billion budget gap," Finance spokesman H.D. Palmer said in a statement. "S&P says that the absence of timely action could lower our rating even further. But if the Legislature acts on the governor's special session proposals, nearly half of that gap can be closed."
S&P cited the usual list of reasons for California's structural budget problems -- a two-thirds vote requirement for budget and tax approval, heavy reliance on the stock market and ballot-box budgeting. It also cited additional factors that hamper this budget, such as the inability to rely on onetime solutions the state used last year, legal challenges and increases in population and caseload.
But S&P noted that the state's revenue assumptions in last year's budget "held up reasonably well." From a cash perspective, the ratings agency said the controller has shown he is willing to take "extraordinary cash management maneuvers" to make priority payments, while leaders approved "modest structural reform" by eliminating annual cost-of-living increases.
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