Fitch, one of the main credit rating agencies, fresh off downgrading California bonds from A to A-minus a little over a week ago, just took them another step down today.
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. 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. The use of IOUs for non-priority payments would offset cash shortfalls into September 2009 as now currently projected […]
With issuance of IOUs for non-priority payments, margins for meeting constitutional and court-required contractual commitments are narrowing. After September 2009, absent any proposed budget and payment adjustments, cash deficits will expand dramatically. Cash flow solutions, including the ability to access short-term borrowing, are inextricably tied to reaching timely agreement on effective and credible budget solutions.
The inability of the state to reach agreement has prompted the controller to begin issuing IOUs for non-priority payments, primarily disbursements to vendors, for certain social services, and for tax refunds, in order to ensure payment of priority payments, including General Obligation and lease debt service. The controller’s office estimates that $3 billion in IOUs will be issued during July 2009; priority payments of $10.8 billion will be made for education, debt service, Medicaid, payroll, pensions and other mandatory contractual obligations. Projections will be revised to reflect June revenue performance and other changes but as currently estimated, cumulative cash deficits of $3.7 billion are projected through August, offset by $4.5 billion in non-priority payments that could be covered with IOUS, excluding tax refunds. However, by the end of October, the projected cash deficit expands to $16.1 billion, well beyond non-priority spending of only $10.6 billion, excluding tax refunds.
It’s true that the IOUs work only until October. But the credit rating is specifically tied to, in this case, long-term bonds. And as I’ve laid out previously, as a matter of law debt service has pride of place in the state Constitution – only education must be funded before it. It would take something like $50 billion dollars in program cuts before creditors must be paid, which is far less than current debt obligations.
In other words, this is a gouging effort by Wall Street, and the credit ratings agencies are downgrading California simply because they can. The fact that every single creditor will get paid in full if California has to close every hospital and prison in order to do it is of little consequence. This is all further reason why the federal government ought to provide loan guarantees to stop the gouging from Wall Street.
he’s now a lame duck and should follow Palin’s lead and stop slurping up the state’s pudding or whatever the hell term she used for what she would be doing if she stayed and did her job. Now I feel bad for making fun of her, when if her speech had let to glory he’d probably be right behind her doing the same! Pass the ball, Arnold! Go hike the Appalachian Trail! Only dead fish go with the flow!
Is Arnold now approaching the national record for the Governor who has presided over his state’s largest reduction in bond ratings? If so, then, seriously, this is an achievement to publicize. His weak point is his vanity.
Which is now literally true: our bonds are now junk-grade.
We’ll see how soon Arnold gets to wait before drowning the state in his bathtub. But at this rate, if he doesn’t, Wall Street is going to take the state out back and shoot it.
You’re 100% right that the Fed should step in and guarantee California’s bonds. It costs the Fed nothing and would save the state a huge amount of money. It’s an absolutely free stimulus plan.
But I’m not sure the downgraded Fitch rating has much of a practical impact on the state’s finances. There are no bond offerings pending or scheduled (and I doubt Lockyer will schedule any auctions until the budget mess is resolved). So the only practical effect of the Fitch downgrade is to lower the price (and increase the yield) of California’s bonds on the secondary market. But this doesn’t change the interest rate the state pays on those bonds.