Moody's likely to downgrade California before warrant sale, state treasurer says.

LOS ANGELES -- California Treasurer Kathleen Brown said yesterday that Moody's Investors Service will probably lower its Aa rating on the state's general obligation bonds today or tomorrow.

Of the three rating agencies that met with state finance officials Monday in New York City, "it is very clear that Moody's has the most serious questions about California," Brown told reporters at a news conference held at the Pacific Stock Exchange in downtown Los Angeles. "I expect we will hear ratings news from [Moody's] in the next two days."

The rating agency meetings were called to discuss the state's competitive sale next week of $4 billion of revenue anticipation warrants, and, on July 27, $3 billion of revenue anticipation notes.

Standard & Poor's Corp. will announce its ratings on the state today. Officials with Moody's and Fitch Investors Service have said they are hoping to release their ratings on the short-term obligations by Friday, and at the same time they are reconsidering the state's GO rating.

Fitch rates California GO bonds AA. Standard & Poor's rates them A-plus.

Renee Boicourt, a vice president and assistant director for Moody's, yesterday declined to discuss what rating actions, if any, the agency has in store for California.

"We met with [California officials] on Monday, and we're reviewing the information they presented," Boicourt said. "We're deliberating all week and we. expect to announce something by Friday. Anything on the long-term rating would be done in conjunction with the rating on the Raws."

Fitch senior vice president Amy Doppelt said yesterday that "a downgrade is possible." Fitch has had a declining trend on the state since March, "signaling that we feel the overall credit factors are declining," Doppelt said. She said if a long-term rating action is taken, it would occur Friday or shortly thereafter.

California's "economy has a lot of problems, [but] there are some strengths over all," Doppelt said.

Brown's comments to reporters were made early yesterday before she met with investors to discuss this month's $7 billion of borrowings as part of a two-year cash management program that Brown said represented "the largest municipal borrowing in history."

Brown, the Democratic gubernatorial nominee, used the specter of a downgrade to launch a political attack on Republican Gov. Pete Wilson, and to tweak investment bankers as well.

"The facts are that Pete Wilson's budget is bogus and it's time to put an end to his fiscal shenanigans," she said. "Just look at the winners and losers in Pete Wilson's budget. The international bankers and Wall Street are clearly the winners because they will make millions upon millions of dollars in interest premiums and in commissions," on the Rans and Raws sales.

Brown called the Wilson budget "a fiscal insult because it will almost inevitably lead to a ratings downgrade, driving California down to the bottom rims of states throughout our nation, and costing taxpayers tens of millions of dollars in higher interest costs."

In response, Harold D. Palmer, assistant director for the state department of finance, whose director was appointed by the governor, said that Brown fails to recognize that the state has some "positive signals. The state economy is coming back."

The rating agencies "realize that we are living within our means," Palmer said. "Our general fund expenditures are being held at or below the amount of revenues we're taking in. These are all very strong and salient points."

David MacEwen, senior municipal portfolio manager for the Benham Group, said he believes "the market already has adjusted" to the expectation of a Moody's downgrade. "The state's GO bonds are already trading like they are A1 and A-plus," MacEwen said. However, if they are downgraded by Moody's two notches, to A, "that will be a bit of a surprise," he said.

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