California debt cut below 'A' grade as budget fight goes on

California's bond debt has a rating that starts with a "B" for the first time since 2004, after Fitch Ratings today cut the state to "BBB" from "A-minus," citing Sacramento's budget gridlock.

The new rating still is "investment-grade" -- but not by much. After "BBB" is "BBB-minus," and then the junk rating of "BB."

California has never had a junk rating on its debt, but it's tempting fate now. Fitch said it is keeping the state on "rating watch negative," meaning another downgrade is possible.

Fitch, a rival of the better known Standard & Poor's and Moody's Investors Service rating firms, is the first of the three to make a move since the state last week began issuing IOUs to cover some of its expenses. S&P and Moody's also have warned that they may cut their ratings ("A" and "A2," respectively). Fitch's decision could give them a nudge.

"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," Fitch said, obviously not telling Californians anything they don't already know.

Still, Fitch said that, by maintaining an investment-grade rating for now, it was indicating that "expectations of default risk remain low." It acknowledged that, under the state Constitution, bond investors have a priority claim on tax revenue, after education funding.

Fitch had a "BBB" rating on California from December 2003 to Sept. 2004, amid the last big budget mess.

Municipal bond traders said market activity today was relatively quiet. Fitch's decision is unlikely to shock owners of California's bonds, although it may drive home that a junk rating isn't out of the realm of possibility (although many muni market analysts still believe the ratings firms won't go that low).

Market yields on California general obligation bonds have surged over the last six weeks as the state's financial situation has deteriorated, but buyers have stepped up in recent days, lured by high tax-free returns.

The annualized yield on 10-year California bonds is in the neighborhood of 5% today, down from about 5.2% at the recent peak but still well above the 4.4% yield of late May.

-- Tom Petruno

Photo: Scene of the crime: the Capitol in Sacramento

 

Comments

[ChargerFan]

I love it. Anything that impacts the state's future ability to borrow more money is great!

[Joseph Mazzotti]

I see the same credit ratings that were handing credit out like candy?? Ya like these crooks opinion should mean anything. The whole credit rating system is flawed and needs to be put out of business!

I bet liehman brothers and indymac both had a+ ratings by all these credit rating companies... I bet the fact that they had only a 30 to 1 debt to asset ratio was never factored in and in fact encouraged by these banksters!

Give me a break... I need to go laugh out loud and roll on the floor too!

[jojo]

agree. California has been handing out "services" and "resources" to citizen and NON-citizen alike for too long. Even CA's new-found ability to "print money" (IOU's) can only kick the can a lil bit further down the road.
after that, REALITY.
if it was my call I'd cut ALL dept. budgets by 10% and bring back prop. 187.....

[John galt]

who is john galt?

[aaron]

Put us back on track, MAKE THE CUTS!

NO MORE TAXES PERIOD!

[August]

At least the state's rating is still higher than most of its restaurant's ratings.

[clvngodess]

I don't understand why the state refuses to tax big oil and big corporations for their fair share of the California tax burden. The amount of revenues from this alone would close the budget gap by two thirds!!!!

Instead these weasels want to suck the blood out of the everyday working and middle class person, and poor person via increased sales tax, cutting social safety net programs and other things that HELP the people of the state.

If the stupid jerks would look at the state and the budget through different lenses, like those of the people who work and live here, instead of the monocle of elitism, we might not have these problems. But I guess special corporate interests always seem to outweigh the needs and will of the people, especially when your political campaign depends on big bucks.

Disgusting.

[KK]

Towards third world rating.........soon. We have cities that looked like third world already. Sadly it is our own doing.

[deartoni70]

What a waste of time and money the special election to recall Grey Davis was. So much for Arnold.. Truthfully we have relatively low income taxes and prop 13 unfairly distributes the burden of property taxes to new home buyers. You can scream all you want about no taxes but California only get's back .80 on the dollar from the Feds and that doesn't help either. No new problems here. ARNOLD FAILED and all the fools that fell for his terminator babble have to suck it up. He cut the car tax and drove our state further into debt. Frankly I would gladly pay $5 bucks more a month in income tax if it would help clean up the mess as long as we eliminate welfare for people who aren't citizens, or mandate birth control if you are going to collect welfare. opps am i a nazi...oh well..

[OC CPA Dude]

Revising the tax code so that the wealthy land owners of California paid their fair share would go along way in this state. I am not saying just undo Prop 13 and keep other taxes in place; but I think undoing Prop 13 and cutting income and sales taxes would do wonders for this state.

[Joey Smith]

TAX THE POOR!!! Raises taxes on the poor so that they have to pay for their services. Just as it is a bad idea to tax the rich because they will leave the state, we should tax the poor and make them leave the state. WHICH MEANS that once all the poor leave because of the high taxes, we can CUT services too!!! It's a win-win... more tax revenue, less poor, less spending... I think the Governator would spoke a cigar to that!

[Tomm D]

Higher taxes won't solve our problems. As of July 1st, we are the third highest taxed state in the country. We have the highest sales taxes, the second highest income taxes, and the sixth highest corporate taxes. Here's the real problem: California has 12% of the country's population and 32% of the nation's welfare recipients. Do the math. Of course we're going bankrupt!

[independent skeptic]

Michael Jackson for governor!! Oh wait, ok, Steve McNair for Governor!

[Dick Diamond]

One of the problems is evident in many, but not all of these letters. People are screaming at each other, shouting as loud as they can to drown out the few sane letters, bloaming everyone but themselves and no one, but but a few, including the "Governator" and the legislature is willing to compromose. I don't see, "Politics as the art of the possible," working in Calfiornia. I see most of the writers all willing to go to Hell togethe and blaming each other on the way down..
What a shame for a state that was my home for over a helf century.
People should stop screaming, REALLY start listening and begin making good things happen.
It's not a natural earthquatke that is sending California into the Pacific, but the bickering among the people. Things are tough all over. Stop blaming and start solving problems, not by punishing this group or that but sharing mutual hardships and joys.

[builder7]

Well, now we see the final results of Reaganization of the economy of California. I guess that they started this not taxing the rich including oil companies that milk California's share of oil for their own $120 billion profits per year in the US. Why, pretty soon California will be like Mexico and I am not talking about the people who live there. Fortunately this voodoo false economics has been cut off at the pass for the United States and not a moment too soon. If any of these so called "conservatives" who have been in charge of things were responsible people and not just for themselves, instead of the greater good, then maybe California would not have to suffer through this. Hopefully the rest of the US does not have to suffer through this. Maybe all of these so called people that say that free enterprise can solve all problems can pitch in and balance the budget in California as good citizens. Of course they will not because they are neither good citizens nor are they concerned about the State or US as demonstrated by their off-shoring of any of the productivity gains that American workers have done. They must believe in negative reinforcement, because by lowering peoples' wages consistently that have built the greatest country on earth will only boomerang bigtime! It is time that we return to tried and tested techniques of economics that we used for 50 years before Reagan. It is time to get back to true 'conservatism' where the government saves money, not just spends it on rich clients who have put money into their back pockets!

[Aletheia Guerrero]

I don't know about any of you but I think this article should only provoke our sentiments on taxation and the right solution to the budget mess tangentially. I am profoundly disappointed with Arnold Schwarzenneger and the legislature on both sides of the aisle for not working more steadfastly towards a budget solution. Whether they are hamstrung by the system as it is or not, they should be clearly focused on how their actions affect something as important as the state's credit rating. They haven't been responsible and responsive and it is going to hurt the state's ability to move towards this and future budgets. It is also going to hurt Californians as we pay more in taxes and cuts and get less. Our elected officials as a group should hang their heads in shame.

[Roger Ramjet]

Richard Nixon for govenor. Oh wait, I'm sorry. Michael Jackson for govenor. Damm, I'm sorry. I'll get it right! Oh yeah, The Terminator for.........

[Erik Kengaard]

Joey Smith gets it.
Socialism stops working when you run out of other people's money.
It is significant that the main stream media is so biased. Seldom any discussion of how to reduce the number of poor. Only discussion of how to provide them with welfare.

[Reno Fernandez]

A city can file bankruptcy (e.g. Vallejo), but a state cannot. So California's debt is sort of like student loans; it can't be discharged, so creditors don't worry as much as they could (or should). What happened in 2004 to knock it down to BBB?

[Tom Petruno]

@ Reno: RE 2004: I provided the hyperlink to the state Treasurer's site in the "Fitch had a BBB rating...." paragraph.

The downgrades to B-level followed the recall of Grey Davis, Schwarzenegger's election, and the budget battle that ensued.

This is from that site:

December 2003
Fitch Ratings lowered the State's general obligation bond rating to BBB from A. All ratings remain on "Rating Watch Negative." Fitch cited California's heavy reliance on the completion of an increased deficit financing and the tremendous amount of measures needed to close a widening budget gap. Also cited was the decision to submit the deficit bonds and the balanced budget proposal for the March 2004 election, injecting another element of uncertainty.

Moody's Investor Service lowered the State's general obligation bond rating to Baa1 from A3, and lowered the ratings on the State's lease revenue bonds and general fund-enhanced tobacco bonds to Baa2 from Baa. The outlook for all of the ratings remains negative. In downgrading the State, Moody's cited the recent Vehicle License Fee cut, stating that the action is expected to significantly increase what is already expected to be a substantial fiscal deficit over the next eighteen months, and the inability of the administration and legislature to reach a consensus regarding the State's fiscal problems.

Tom Petruno

[Tim]

Reality Check,

Rich people in CA pay more than 60% of their income in taxes when you add up local, state and federal taxes. So, for all the "tax the rich" proponents, one question; What percentage will satisfy you? At what point will you realize that politicians and special interests have conspired to deliver a government that has current and long term liabilities that no amount of taxes can correct?

[alvinyorkie]

Thomas Sowell wrote the best book I have ever read describing how our country got into this mess.The title is "The Housing Boom and Bust". Everyone is to blame: Republicans, Democrats, Wall Street, Advocacy groups and almost everyone else you can think of. When you get right down to it, Congress made the mess because they made the rules others had to follow. The problem is that the same bunch saying they are fixing the problem are the ones who caused it. We need a real house cleaning in Washington. They are truly the problem.

[First to say it]

The best way to fix the budget is California to cease from the union and keep the federal taxes to ourselfs. Or we just stop to pay federal taxes and go to the situation prier to 1913 when the illegal federal tax was instituted. One way or another we can not bear more then 25% total tax. Now we pay more then 50% of our income to various government entities. 25% Income tax 15% social security, 4% California income tax, 10% sales tax = 54%. And here I am not even including the property and other taxes. We are taxed way too much on federal and state level combined. Enough is enough!!!