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California's credit rating cut to lowest of all 50 states

February 3, 2009 |  9:40 am

California today was branded the worst credit risk of all 50 states, after Standard & Poor’s cut its rating on the state’s debt because of the budget impasse.

S&P lowered its rating on the state’s $46 billion in general obligation bonds to "A" from "A-plus," citing "the state's inability to reach an agreement on a mid-year budget revision and its rapidly eroding cash position."

Until now, California and Louisiana had been tied for last place, at "A-plus," on S&P’s state ratings list. Most states are rated either "AA" or "AAA."

California_state_flag "At its current level, the rating generally recognizes our view of the lack of political progress around the budget negotiations that we believe is serving to exacerbate the state's current and projected cash position," S&P said.

The Legislature and Gov. Arnold Schwarzenegger have been at odds over how to close the yawning budget gap, estimated at $42 billion through fiscal 2010.

What’s more, S&P warned, "Despite what we consider the state's strong longer-term economic fundamentals, we judge prospects for an imminent or brisk economic and revenue recovery to be unlikely."

The ratings firm also wasn’t swayed by potential help from Washington in the fiscal-stimulus package for the economy that Congress now is debating.

Despite its money woes, California can't arbitrarily decide to default on its debts; the state Constitution mandates that debt principal and interest must be paid as promised.

But a lower credit rating can lead investors to demand higher interest rates on new bonds the state sells for infrastructure projects, or on short-term debt issued for cash management purposes.

S&P's rival, Moody's Investors Service, still has California tied with Louisiana for the lowest credit rating among the states, at "A1." But Moody's warned on Jan. 21 that it may cut the state's rating if the budget battle drags on.

-- Tom Petruno

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