S&P downgrades state credit to lowest in nation

Citing the political stalemate on closing the state's whopping budget deficit, Standard & Poor's, one of the Big 3 credit rating agencies, today downgraded California's general obligation bond credit rating to the lowest of any state.

California had been tied with Louisiana for last place with an A-plus rating, but S&P today dropped it to A. The action will not have any immediate effect on California bond sales, since the state is not marketing any GO bonds now, but it could drop the value of outstanding bonds in the secondary market.

S&P and the other agencies had signaled that they were ready to downgrade California a couple of weeks ago by dropping ratings on the state's short-term notes, but held off a more general downgrade until learning whether Gov. Arnold Schwarzenegger and legislative leaders would meet their self-proclaimed Feb. 1 deadline for budget action.

That deadline passed Sunday, and it appeared today as if significant political roadblocks still remain to a budget deal, even though the state controller is beginning to stop payments to some vendors and governments because of a cash shortage.

"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.

"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," it added.

"Given current circumstances, it's unfortunate but not unexpected," H.D. Palmer, a spokesman for the state Department of Finance, said. Palmer's boss, Finance Director Mike Genest, had pleaded with the rating houses to hold off a general downgrade until Feb. 1.

With the S&P action, the other two bond rating firms, Moody's and Fitch, are expected to follow suit soon.

Posted by Dan Walters
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