WASHINGTON -- Standard & Poor's Corp. yesterday placed California's lease revenue bonds on Credit Watch with negative implications, and Moody's Investors Service voiced "serious concerns" that the state's prolonged budget crisis has left it with no clear legal authority to appropriate lease payments.
The rating agencies warned that the impasse may force the state to use reserve funds to make bond payments due Sept. 1 on issues totaling almost $2 billion, violating the state's legal covenant to appropriate payments.
State Treasurer Kathleen Brown said Monday that without an enacted budget or other emergency legislation giving the state authority to use cash it has available to pay the bonds, she will have to tap into the bonds' debt service reserves to make payment at the beginning of the month.
As she predicted, the prospect of that "technical default" provoked the forceful reaction yesterday from the rating agencies, including urgings to quickly pass a budget and protect the state's "unblemished payment record."
Moody's listed 13 state lease issues totaling $2.167 billion, all of which have payments due Sept. 1 totaling $109,162,495. Moody's currently rates all of the issues A1 or provisional A1 as a result of other recent downgrades.
Standard & Poor's Corp. currently rates all the state's $2.8 billion of lease issues only a notch above junk bond levels at BBB-plus or somewhat higher at A-minus.
Moody's noted that debt service reserves are available to make the Sept. 1 payments for all but one of the 13 state issues -- a $51 million Board of Public Works Series 1991A Energy Efficiency Revenue Bond issue. Accordingly, the energy efficiency issue is "of particular concern," Moody's said.
In addition, two public works board issues worth $346-million for the University of California, 1988 Series A and 1990 Series B, may be paid by funds available to the university even without an enacted budget, Moody's said.
However, for the rest of the issues, "resorting to reserve funds for debt service would pose serious questions about the state's regard for its lease revenue obligations," the agency warned.
Despite the dire warnings Ms. Brown said she was "pleased" that the Moody's report does not mention possible downgrade action. She said that tapping reserve funds "ought not to be a cause of downgrade action."
"If we are to be downgrade, it will have a far-reaching impact," she added. "Not only will individual bondholders be hurt, but taxpayers across the board will be damaged."
Ms. Brown and the rating agencies said the only way for the state to ensure it does not miss the lease payments and get downgraded is for the state Legislature and Gov. Pete Wilson to quickly come to an accord on the budget, which contains appropriations for the lease bonds.
Short of that, the Legislature is considering emergency legislation to authorize payment of the lease obligations out of existing state revenues without dipping into the debt service reserves.
The Assembly was expected to consider late yesterday or today a bill that would authorize appropriations for rental or energy service contract payments even without a budget. The bill notes that tapping the bond reserve funds would "have negative long-term effects on the credit of the state" and "bondholders could pursue legal remedies against the state."
But the prospects for resolving the budget impasse and passing the emergency bill appeared cloudy at best yesterday. The rating agencies said the likelihood that the budget crisis will extend beyond Sept. 1 is growing.
In addition, Gov. Wilson indicated that he may not go along with the bill providing the state with emergency authority to make the lease payments, and instead is viewing the prospect of default as a way of pressuring lawmakers into passing a budget.
"We think it is premature to pass any urgency legislation," said Cynthia Katz, spokesman for the state Department of Finance. "The solution to this issue and all the other issues is to pass a budget." Gov. Wilson is "real concerned that these urgency bills would take the pressure off the Legislature," she said.
David Takashima, legislative analyst for Assemblyman Steve Peace, D-San Diego, who chairs the Assembly Banking, Finance, and Bonded Indebtedness Committee, responded that the governor is using the lease bonds to "blackmail" legislators.
"If we default on the lease bonds, it's not going to be the fault of the Legislature," he said. "We're going to attempt to pass the legislation and then let him be the one holding the bag."
Jim Lewis, press secretary for Assembly Speaker Willie Brown, D-San Francisco, agreed.
"I don't think we could feel any more pressure," Mr. Lewis said. "It's like a question of whether you walk through a fire that's 1,000 degrees or 10,000 degrees. You still get burned."
State Treasurer Brown said the governor's view of the urgency legislation was "crazy."
In case the legislation is not passed, the state's legal counsel has been investigating whether several existing statutes can be used as authority to make the bond payments, Moody's said. An attorney for Orrick, Herrington & Sutcliffe, the state's bond counsel, said he could not elaborate on the situation.
