WASHINGTON - California managed to deliver payments due yesterday on $2.2 billion of lease revenue bonds, but rating officials said the state faces another challenge in meeting the debt service due Oct. 1 on another $430 million of lease issues.
Despite the state's success through extraordinary legal and financial maneuvers in overcoming its budget deadlock and making yesterday's $109 million of debt service payments, Standard & Poor's Corp., Moody's Investors Service, and Fitch Investors Service said they would not yet lift their credit alerts over the state's bonds.
That is because it was still unclear how the state would resolve its budget situation and pay nine issues with debt service due Oct. 1. Those issues include a $279 million Public Works Board lease revenue bond issue this year for California State University, as well as four 1986 board issues for university facilities at Long Beach, San Luis Obispo, Irvine, and San Diego.
Also due Oct. 1 are payments on four certificates of participation issues securitizing state lease payments for return-to-custody facilities at Adelanto, Coalinga, Delano, and Folsom, Standard & Poor's vice president Jeffrey L. Thiemann said.
George Valverde, a Public Works Board official, said the state has enough surplus funds and capitalized interest to make payment of the five board issues even without a budget. In addition, he said the state could draw on the continuing appropriations authority cited by state Controller Gray Davis in making yesterday's payments, if necessary, to meet its October obligations.
Mr. Davis, who has been struggling each day to pay the state's immense bills and obligations, declined yesterday to say whether he would use that authority again. "We'll deal with that later," he said.
"My theory of life" at this point, he said, is to "honor the state's obligations as best we can. You have no credibility unless you timely and regularly meet your obligations, and I believe we came up with a credible legal theory that justified payment" of the bonds in cash, rather than with registered warrants or IOUs, when it was needed, he said.
Mr. Davis added that he expects the budget impasse to be resolved within the next day or two, freeing him to make payment through the regular appropriations process.
Despite the state's strenuous effort to meet its obligations, the rating agencies were reluctant to give any quick exoneration to the state.
"Everything for us remains on review," said George Leung, Moody's managing director for state ratings. But he agreed with state officials and attorneys who said that the controller's newly asserted continuing appropriations authority should enable the state to make the Oct. 1 payments.
Mr. Thiemann said that Standard & Poor's, which last week placed all the state's lease issues on CreditWatch with negative implciations, may remove some issues from the list in the next day or so. But the agency will continue to watch how the state handles the Oct. 1 issues and its remaining budget problems, he and agency senior vice president Sally Rutherford said.
Fitch, which has placed the state's general obligation bonds as well as its lease bonds on FitchAlert, is "still looking to see what the budget looks like. We won't make any rating decision; everything will stay on FitchAlert until" the budget impasse is resolved, said Amy Doppelt, agency senior vice president.
Ms. Doppelt said Fitch would like to see the state Legislature pass emergency legislation ensuring that payment on all the state's lease issues and bonds - not just the Public Works Board bonds - can be appropriated by the controller in the absence of a budget.
State Treasurer Kathleen Brown, who has championed such legislation, also called for its enactment late Monday to prevent any shadow from being cast over the state's credit ratings by future budget impasses.
"While I am pleased the state will be able to pay its debt service without tapping into reserves, we have been taught a lesson: California's fiscal reputation will suffer unless all of our debt obligations are properly met in the absence of a budget," she said.
"This time, the state was able to meet the debt payment through legal interpretations and the effective management of available funds. But next time, we may not be so fortunate."
The emergency bill nevertheless was one of many to get lost in the shuffle yesterday as the state Legislature strived to complete action on a budget agreement and adjourn for the year.
In a last-ditch effort, California lawmakers worked feverishly on a compromise education spending plan, one of the key remaining pieces to the budget agreement.
Gov. Pete Wilson said Monday that without a satisfactory education bill, he could not sign a $57.5 billion budget passed by the Legislature over the weekend because it would be out of balance.
Since passage of a deadline for adjournment at midnight Monday, the Legislature has been operating under special rules in an extended session that require it to muster a two-thirds majority for any legislation.
"It feels a lot like a chess game here," said Cynthia Katz, spokeswoman for the State Department of Finance. "The governor and the Speaker [Willie Brown, D-San Francisco] are checkmating each other."
