MOODY'S LOWERS STATE OF CALIFORNIA GO BOND RATING TO A1 FROM Aa3; LEASE DEBT LOWERED TO A2 FROM A1;

MOODY'S LOWERS STATE OF CALIFORNIA GO BOND RATING TO A1 FROM Aa3; LEASE DEBT LOWERED TO A2 FROM A1; MIG1 RATING ON RANS AFFIRMED

NEW YORK, Nov 20, 2001 -- Moody's has lowered the rating on $19.9 billion of State of California General Obligation bonds to A1 from Aa3. In addition, we have lowered the rating on $5.5 billion in lease revenue bonds from A1 to A2.

This rating action reflects Moody's expectation that the state's General Fund budget and liquidity position will weaken substantially over the next eighteen months, in light of weakness in the technology sector of the state's economy, greatly reduced state revenue projections, and the likelihood that the state will have great difficulty reaching consensus on the necessary fiscal adjustments during its upcoming budget session. The structural gap between revenues and expenditures is now projected at more than 10% of revenues in fiscal 2003, on top of a deficit and likely liquidity shortfall in fiscal 2002. Efforts to partially restore the state's liquidity through a sale of electric power revenue bonds have stalled due to serious policy disagreements within the state government, and any sale of power bonds during fiscal 2002 is now unlikely in our view.

The new rating of A1 still indicates above-average credit quality, reflecting the state's broad based and dynamic economy, which is well-positioned for long-term growth after the current period of weakness has run its course. In addition, the rating reflects the state's volatile tax revenue performance, and a moderate burden of state tax-supported debt. State general obligation bonds are secured by the state's full faith and credit pledge, and benefit from a claim on General Fund revenues that is second in priority to annually budgeted K-12 public education expenditures. The rating outlook at this point remains negative, reflecting the possibility that economic recovery could be delayed beyond the currently anticipated timeframe, further straining the state's finances.

At this time Moody's affirms its MIG1 rating for the state's $5.7 billion Revenue Anticipation Notes issued earlier this year to fund current year seasonal cashflow needs. While the state will likely be forced to seek alternate external liquidity in the event that the power revenue bond sale does not occur before June 30th, at the present time Moody's is confident the state will be able to secure the necessary liquidity to ensure the notes are retired on schedule.

...(snip)...Last month, the Governor indicated that the projected cumulative deficit for fiscal 2002 and 2003 could range from $8 - $14 billion. The recently released LAO report estimates the 2003 imbalance at approximately $8 billion. In an effort to begin to address this projected imbalance, the Governor has issued a directive to all state agency and department heads to prepare proposals to reduce their fiscal 2003 budgets by 15%. These proposals will be a key component to the Administration's upcoming fiscal 2003 budget recommendation.

Moody's recognizes the proactive steps taken by the Administration to address the estimated shortfalls for both the current and budget fiscal years. However, we expect any budgetary reductions of this magnitude will lead to protracted legislative debate, potentially extending into next summer. And differing opinions as to the timing and strength of the economic recovery may further complicate legislative efforts to resolve this imbalance, as will the upcoming elections in 2002. If the deficit for the upcoming year reaches $8 billion as both the Administration and the LAO estimate, the state may be hard pressed to eliminate this gap solely through expenditure reductions.

The state's current financial plan assumes that prior to June 30, 2002, the State Department of Water Resources (DWR) power bond sale will be finalized and the General Fund will be fully repaid the $6.2 billion it is owed for past power purchase advances. However, actions taken by both the State Legislature and the California Public Utility Commission (CPUC) concerning the rate agreement between DWR and the CPUC have increased the risk the state will be unable to issue these bonds prior to the end of the current fiscal year.

These actions include: the CPUC's rejection of the rate agreement as currently proposed by the DWR; and the legislature's adoption of Senate Bill18XX which could lead to protracted litigation over existing DWR power purchase contracts. The SB18XX legislation - which has not, as of yet, been forwarded to the Governor for consideration - would establish a bond set-aside payment that would have first priority of payment claim. This change could likely lead to impairment of contract litigation by the power generators. The Governor is expected to veto SB18XX. It is not known at this time whether the legislature will act to override his anticipated action. Should the veto hold, the CPUC's intentions are unclear given its reluctance to support the DWR rate agreement for the power purchase bond program as authorized in AB 1X.

If the economy were stronger, the state would have more time to consider alternative approaches to the DWR power bond program authorized under AB1X. However, given current tax revenue risks, General Fund liquidity depends heavily on receiving expected power bond proceeds no later than the last quarter of the fiscal year. Absent those proceeds, it is likely that the state will need an alternate source of liquidity, similar to the Revenue Anticipation Warrants issued in the early 1990's.

....(snip)...Moody's credit outlook for California's long-term debt remains negative, reflecting the possibility that national economic recovery could be delayed beyond the currently anticipated timeframe, further straining the state's finances. The state's sizable structural budget imbalance has been exacerbated by the slowing national economy in the aftermath of the September terrorist attacks, and there is great risk that the state's budget reserve and most of its other liquid resources will be depleted by the end of this fiscal year. Given the projected size of the structural imbalance, the state is likely to have difficulty reaching consensus on a plan to restore budgetary stability. A successful issuance of power revenue bonds would significantly restore liquidity, but it is unlikely to occur prior to the end of the fiscal year. Moody's expects the state to access alternative liquidity in the form of Revenue Anticipation Warrants similar to actions taken in the early 1990's.

The above is supplied for academic interest and discussion and I suggest you click on the URL to read the entire article

What I find interesting regarding the California Power Crisis is that Moody's view of the lack of a Power Bond is as a liquidity problem with the state and not as a fundamental difficulty. They do provide some interesting insights into what next years budget debates may look like and they point out that the K-12 has the highest priority on the state's budget.

Their long term outlook for the state is not too promising. It should be interesting to watch how Gov Davis tries to spin this evaluation.

They may be brain-dead, but I think that Moody's is giving a pretty harsh view of the future.

However, we expect any budgetary reductions of this magnitude will lead to protracted legislative debate, potentially extending into next summer. And differing opinions as to the timing and strength of the economic recovery may further complicate legislative efforts to resolve this imbalance, as will the upcoming elections in 2002. If the deficit for the upcoming year reaches $8 billion as both the Administration and the LAO estimate, the state may be hard pressed to eliminate this gap solely through expenditure reductions.

Let me try to translate. The legislature and Governor will have to raise taxes during an election year and they will do that only after Wall Street puts a gun to their head. The brain-dead voters will be so pissed that taxes get raised in an election year that they will likely vote the rascals out.

Should be an intersting year.

This is very big financial news.

That the cost of new borrowing for California just went up is just the tip of the iceberg. If Moody's is right, California will have trouble even coming close to balancing its budget next year. A recession will make that even harder.

In other words, a further downgrade is likely next year. The problem is, California debt is already close to "junk bond" status. Once it enters that category, the cost of debt skyrockets.

California is in trouble, and that trouble is likely to get worse.

Some idiot Democrat legislator was floating the idea of "temporarily" bumping the sales tax to 10%. The bozos in Sacramento don't understand that the main reason our once thriving aerospace industry fled the state was over-taxation and over-regulation. Gray-out Davis' energy policies have caused many companies to re-think their decisions to locate facilities in California.

California is in trouble, and that trouble is likely to get worse.

Well said. I think that the higher electric power prices to be paid principally be California industries and the air pollution regulations that target business, will also make economic recovery that more difficult. It is a world competitive market and California has handicapped its business community with high electricity and regulatory costs. That spells trouble for employment, income tax revenues, sales tax revenues for the state.

You got to understand that for a tax-&-spend legislator, when the income tax revenue doesn't come in and the property tax levels are fixed, the only choice they can see is to raise sales tax! Sure, economic theory says that there is price elasticity and that as you increase the price (say by increasing taxes) less of it will be purchased and that can translate into less employement and less business tax revenues and less sale tax revenues, but hey, people elected to govenment office don't need to understand economics.

That is why folks like Moody's rate the bonds of government agencies. Moody's tells the world how well a government agency can repay its debts and provides the tax-&-spend legislators with feedback on what they are doing to their economy.

Thanks so very much for finding and posting this!!!!

A local radio station here in So Cal had the news last night , rather garbled of course , including an interview with Gov Davis!

What a Putz!!!

He says no problem, we will figure this out and he had just heard last night that the Energy Crisis had generated 4500 jobs in Silicon Valley to come up with products to help California with the Energy Crisis!

I about veered off the road in anger to hear that damn whiney voice!

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As I am up to my @*# in alligators at the moment at work, trying to help a client with an important piece of broken infrastructure figure out how to get it immediately repaired. I wanted to tell you that your response made me laugh. The moment of laughter was appreciated in a hectic day!

...the Energy Crisis had generated 4500 jobs in Silicon Valley to come up with products to help California with the Energy Crisis!

I about veered off the road in anger to hear that damn whiney voice!

One of these days, Davis will try to tell a whopper and people will call him on it. Maybe if he generated so many jobs with the energy crisis, he can expand to create other crisis in California to create even more jobs. Perhaps this is his unified theory on economic recovery; create enough disasters so that thousands of people have to solve the problems Davis makes, as a way to solving employment problems. (/sarcasm)

It's really quite simple in terms of outcomes. Either the Democrats have to raise taxes or cut spending. They don't know how to do the latter--they only threaten to do so as a pretext for raising taxes.

Or the Tooth Fairy could come.

I'll bet they raise taxes.

I'll bet they raise taxes.

Even in an election year? If it were not an electon year, I would agree with you completely. I remember tax & Spend Democratic Governor Mike Lowry of Washington State being elected in November on a promise not to increase taxes and then in December before he was sworn in coming up with a tax increase plan. That was pretty obvious to most of us in Washington State, but also confirming that the Dem's would bit their tongue on discussing tax increases until they had counted their votes.

I see Davis and the Democratic California State legislature as knowing that a tax increase in an election year is bad politics. If they had the ability to delay an emergency legislative session until early December 2002 after the elections, I could see them doing that.

Unfortunately for them, everything I read says that doomsday is prior to June 2002. Moody's seems to have established that as a pretty clear deadline. The FERC seems to be also helping out with small change requests for a billion here and there that should keep the pressure on Davis.

If they don't raise taxes, where will they get the money to run the government? The situation is so dire (or will be) that the normal way of postponing tax increases, borrowing, may not even be an option. California is already seen as a credit risk, and it's entirely likely that they couldn't get a loan if they begged.

The other option would be a federal bailout. I'm sure they'll ask for one because they will be able to play the politics of the "cruel Republicans in Washington taking it out on California for supporting Gore."

I suppose you're right about the timing, though. If Davis can somehow limp through the election without raising taxes, he'll try. The question is how bad will the situation be. My guess is that it will be very bad and that next summer we'll be discussing the potential bankruptcy of California (not that I believe that will happen).

I might be a bit negative, but as a non-Californian (I was stationed there 82-84) I see your state as one with a burgeoning Third World sub-culture with a First World welfare system all predicated on the myths of the Left and of course totally bankrupt (perhaps literally) of any logic. To sum it up you have problems that could quickly spiral out of control unless the usual suspects, dogooders, ethnic hustlers, pork barrelers are not reigned in by some conserving force.

Actually, I think that there will be very very reluctant tax increases in California. I agree with you, but wanted to make the point that it will be both policially suicidal for the democrats and take them a long time and then only facing judical and state consitutional mandates and the cutting of many social service programs that they can not do.

Again, you are right, they will raise taxes, but it will be over their politically dead bodies. Republicans need to start thinking of how they can capitalize on the coming year of Democratic party agony!

Actually, I live in the the Soviet Socialist Republic of Washington. I have lived briefly (in the early 1970's) in San Francisco California, but was born and raised in Washington State.

I agree with much of your description of the politics of California. About the only thing you left out is the incredibly rich Hollywood and Music Industry types who feel guilty about their undeserved wealth and susidize all kinds of "feel good" politicians, environmental & animal rights groups and wacho new age religious groups.

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