Illinois slips below California in Moody’s credit ratings

by Brian Leubitz

Sometimes you just have to celebrate small, even microscopically small achievements.  I think this would be one of those small ones:

After being stuck in the ratings basement since 2009, California’s credit rating now ranks better than Illinois, according to Moody’s Investors Service. Illinois was slapped with an A2 rating last week, worse than California’s A1. Moody’s penalized Illinois for unresolved pension liabilities and delayed payments. (SacBee)

Hooray, we’re #49 in one of the three major credit ratings.  Of course, much of this discussion is baloney for a number of reasons.  As Robert pointed out in 2010, we actually have a much lower debt to GDP ratio than any of the European countries of concern.  It is currently hovering around the 5% mark, hardly crisis levels.

And then there is the underlying guarantee enshrined in our Constitution. As Treasurer Lockyer wrote in the LA Times:

California has never failed to make its bond payments on time and in full, not even during the Depression. And there is no chance we will smudge that pristine record.

Payment of debt service is constitutionally protected, with bond payments required even when the state is operating without a budget. Debt service has second call on general fund dollars, right behind education. Under the California Constitution, making sure bond investors get their money is a higher priority than providing healthcare to kids, protecting the environment and keeping our communities safe.(LA Times)

But you know, the credit rating agencies have their own priorities, shock doctrine and all that.

Hooray for #49!

From the Los Angeles Daily News today comes one of the more sickening stories I have read about the LA City Council mishandling the operation of the City of Los Angeles. Unlike many cities in financial meltdowns, the LA Council is actually blamed by bond rating companies for the financial disaster–NOT JUST THE ECONOMY. Council Member and Lt. Governor Candidate Janice Hahn was singled out for her words and recommendations without knowing the impact of her recommendation. As the Daily News said:

Last week it stopped being funny.

L.A. council dithers as city nears fiscal cliff

Those were real tears in the City Council chamber as members of the various public employee unions made their case why 4,000 of them shouldn’t be fired due to the budget sinkhole that promises to swallow us all.

Moved by the tears, Councilwoman Janice Hahn proclaimed, “It’s time for us to lay off private contractors and keep our city workers!”

In Hahn’s world there’s a hierarchy of sorrow. A city worker losing his job is somehow worse than you losing your job. Unemployment is clearly more tragic if the laid off worker has a union card in his wallet. This must come as a great comfort to the thousands upon thousands of private sector taxpayers in L.A. who have been fired over the past 18 months. Sure you lost your job and your health insurance. OK, so you’re upside down on your home, your taxes have been hiked and your pension has plummeted, but at least you are not one of those poor city workers who might lose his job.

Janice “Evita” Hahn cavalierly suggests firing private contractors, as if their children’s stomachs fill themselves. Fired is fired, Ms. Hahn. Nonunion tears are just as salty.

All three credit agencies cited the same reason for their pessimistic view of Los Angeles: The mayor and City Council have been MIA during this financial crisis – a crisis largely of their own making.

The Daily News goes on to detail that the LA City Council REPEATED ignored the advice of the financial folks that work for the City to act or more folks would loose their city jobs. As the Daily News put it:

The Spring Street Ostriches continue to twist like Cirque du Soleil aerialists as they try to come up with any reason to avoid doing anything. Every day of delay layers an additional $380,000 in debt.

If someone ever writes a book about our current generation of L.A. politicians the title will be “Profiles in Cowardice.”

The highest paid City Council in America continues to dither while this great city crashes on the rocks of insolvency. To add insult to injury, Janice Hahn and Company are only interested in drying the tears of the public employee unions and the special favored few.

H/T To LA DAILY NEWS and Writer Doug McIntyre

Link to Full LA Daily News Story: http://www.dailynews.com/ci_14…

Treasurer Bill Lockyer has been going all around the nation to sell California debt. And suffice it to say he was not one bit pleased with the so-called prediction of debt default.

The state Treasurer’s Office came down hard this afternoon on a prediction from California Lutheran University economists that the state could default on some of its debt, calling the warning “balderdash” that is “nothing more than irresponsible fear-mongering with no basis in reality, only roots in ignorance.” (SacBee)

I guess he’s a bit shy today.

Treasurer Bill Lockeyer issued a written statement today, and you can practically hear the tone in his voice: (h/t John Myers)

“With every passing day, the State’s credit rating moves closer and closer to the junk pile. If the Governor and Legislature dump us on that pile, they will end indefinitely the State’s financial ability to build schools, highways, levees — all the critical public works we need to rebuild California. If our credit rating sinks to junk status, the State will find the door to the infrastructure bond market locked shut.

“If we’re denied the ability to sell bonds, financing for infrastructure projects will cease. It won’t slow. It will stop. Many thousands of California workers will lose their jobs. Thousands of businesses will lose billions of dollars in revenue. At the precise moment our best economic recovery effort is most needed, we will fail.

Now, you would think this is an equal castigation of all parties. And I think that is the spirit in which it was intended. However, Lockyer did dip into Arnold’s bag of tricks on the question of dealing with non-budgeting issues.

I ask them to stop devoting energy to any issue that does not directly relate to closing this year’s budget gap without adding to out-year liabilities. Give Californians and the world a pleasant surprise, for once: Balance the budget now, and get back to the work of getting our state back to work.

Note to Lockyer: there are 120 legislators. About 10-20% of those legislators are tied up full-time with budget stuff. There are other serious issues that need to be dealt with, ignoring them doesn’t make them any less real.

In the last 18 hours, we’ve gone from stirrings of a possible deal to what has been called a “stall.” The stall, as Speaker Bass notes, is the “elephant in the room,” Proposition 98 and education cuts.

Further complicating this mess, we have more credit rating downgrades.  Moody’s now has us down to a Baa1 credit rating, and Fitch has us at BBB.  Basically, we are hovering just a step or two from Junk bond status, and in terms of the interest rates that we are having to pay right now, the difference between our bonds and junk bonds really isn’t that great.  

It is pretty clear by now that at least some part of the budget gap will be made up with more borrowing. The wherewithal for a full cuts-only budget just isn’t there, on any side really. So instead, we are borrowing from the future, not just in the pure borrowing sense, but also in that we are cutting our investment in education. However, with these credit ratings that we now have, it will be the current borrowing that will be the object of budgetary consternation for the next few years.

Of course, the fact that we have to use these IOUs has made the problem far worse, to the tune of at least $26 million in July alone. But while George Skelton can see that the Governor’s overreaching has much to do with our IOU summer, he also brazenly repeats a conventional wisdom repeatedly borne out to be inconsistent with the facts. You know the schpiel, the May 19 election was supposed to mean that the voters wanted cuts, cuts, cuts. Of course, Skelton, and most of the Broderists calling for a “mandatory” shock doctrining of the state, repeatedly fail to acknowledge the facts that most Californians want a balanced package of cuts and taxes.

But why bother noticing what California’s voters actually want when you can read tea leaves from 24% of the electorate that understood/cared about what was going on in May that they bothered to vote.  I mean John and Ken say that there is rage boiling over about taxes, and we can’t dare tax the oil companies, or the rich, or the people will explode.  Never mind the fact that it simply isn’t true, we MUST cut everything, because that is what the Real Serious People know to be true.

Will we ever default on our bonds? No, our constitution really won’t allow for that. But can you blame the credit rating agencies for looking askance at our system? They see it is broken, and in financial circles, that calls for high interest rates. But while Skelton and the conventional wisdom of the Sacramento swamp imply that we just should have cut and be done with it, there are only easy answers in a system that has lost its conscience.

Of course, we really aren’t that far away from that, are we?

I’ve been wondering what the federal government plans to do if California really cannot pay our bills any more? Will they allow us to descend into further cuts to already bottom dwelling public services? Will we be forced into it by the Republican minority in the state Legislature?  And more importantly, if we cannot come to an agreement, and we actually see the Republicans pull the trigger on the gun they have had to pointing at California for years, what will the feds do? Will there be a bailout? Must our state leaders crawl on glass or something to prove our desperate we really are?

Well, perhaps there is an indication in the situation with our revenue anticipation notes (RANs).  There is indication that the feds might help out.

“We’re going to need cash-flow borrowing the likes of which California has never seen, at a time when market and economic forces are stacked against us,” said Tom Dresslar, spokesman for state Treasurer Bill Lockyer. “That’s a recipe for calamity.”

*  *  *

A spokesman for the House Financial Services Committee, chaired by Rep. Barney Frank, D-Mass., confirmed that Lockyer had met with Frank in late March, and that Frank was in the process of drafting legislation designed to aid states and local governments with problems similar to California’s.

“There is something in the works,” said spokesman Steve Adamske, “and that should be drafted by the end of this month … there are several ideas being considered.”(SacBee 4/15/09)

RANs are the state’s version of commercial paper. The money that the state needs to operate comes in unevenly throughout the year, so we have to sell bonds based upon our expected revenues. Usually it works quite smoothly, but because of the credit squeeze and our poor credit rating, things aren’t expected to be as easy this summer.

So, we go a-calling on the feds to guarantee our loans or something else to get our credit moving.  Perhaps this is revealing as to what will happen the next time we come a-calling.  If the feds don’t back us now, well, our day of reckoning will come sooner rather than later.  If they do help us out, perhaps the pattern, co-dependent as it may be, will continue.

Either way, it is important that we get this loans, but the tea leaves aren’t quite clear as to the future.

While we push for this program or that program to be kept out or left in the final budget, the investor class has rendered their verdict on California, and you can hardly blame them.

The downgrade of $46 billion of California’s general obligation bonds by Standard and Poor’s on Tuesday sets the stage for similar actions by Moody’s Investors Service and Fitch Ratings as the state’s budget crisis persists, analysts said on Tuesday.

“It’s a red flag,” said Christopher Thornberg, an economist with Beacon Economics in Los Angeles. “What they’re responding to is the fact that the state is running out of cash.”

S&P cited the state’s weakening finances and slow talks between Gov. Arnold Schwarzenegger and lawmakers over closing a budget gap topping $40 billion through this fiscal year and the fiscal year beginning in July.

The agency cut its rating late on Monday on California’s GO debt, which is backed by the state’s general fund, to “A” with a stable outlook from “A+.”

The final straw was California’s cash shortage. “It just to us indicated another level of distress in the overall situation,” said S&P director Gabriel Petek.

What this means is that the value of outstanding bonds will be lowered, and more importantly, it will become incredibly steep for the state to borrow money.  If you weren’t aware, that’s how we finance the state.  It will not be possible to do so at usurious rates, which we brought completely upon ourselves, and so there is now no reasonable way out of the death spiral.  No matter what the budget solution.

Congratulations, Yacht Party.  You sunk California.  Have fun living in it.

From Dan Weintraub’s California Insider, a portion of Moody’s report describing the increase of California’s bond rating to A1:

California’s rating remains low compared to other states due to its ongoing fiscal challenges. The most immediate challenge is the state’s stubborn structural budget gap. Although moderate in size on its face — at less than 4% in the fiscal 2007 budget proposal — the gap remains a concern for three reasons: (i) its persistence after several years of good economic performance; (ii) the state’s still relatively narrow budget reserves; and (iii) the state’s high degree of reliance on tax revenue from volatile sources such as corporate net income, capital gains, exercised stock options, and high-income taxpayers generally. Although the conditions do not appear to be in place for a sharp high-end income decline in the near-term, this represents a significant area of potential exposure for the state. Any significant revenue underperformance in the near term would directly lead to a swelling of the structural imbalance and cause difficult budgeting challenges.(California Insider 5/22/06)

The upgrade, along with the similar move by Standard and Poor’s, will make the bonds substantially cheaper.  For a quick history of our credit rating, see the Treasurer’s website.  This is a really great thing for the state, it will save us millions of dollars on both outstanding and upcoming bond issuances.  However, the cynicism showed is probably something that should be taken to heart by those in Sacramento.  The windfall is not something that we should be counting on next year.  We still have yet to really fix the structural deficit. 

And the phrase “difficult budgeting challenges”, that’s a laugher huh?  Every year has difficult budgetary challenges.  Every year we hash out some sort of bizarre plan that makes nobody happy, but is required by the damn supermajority rules.  If push comes to shove and there is a real revenue crunch we end up imploding (see: Davis, Gray).

In the past we sought to use the extra revenue in fashions that bought us peace in Sacramento.  but that’s not necessarily what we need most.  What we need most is a workable budget that kowtows to nobody, but succeeds in following a vision of long-term stability.  The windfall should be used to ensure that the state can sustain economic hardships without resorting to political rarities.