LOS ANGELES -- Moody's Investors Service yesterday lowered its rating on $16.06 billion of California general obligation bonds to Aa from Aa1 after state lawmakers failed to agree on a fiscal 1993 budget.
The rating agency also downgraded ratings on $2.88 billion of state lease-backed debt to A1 from Aa.
With the downgrade, Moody's made good on its warning last week that it would lower California's rating unless officials produced a fiscal 1993 budget by yesterday.
"Under other circumstances, a delayed budget need not lead to a rating revision," Moody's said yesterday in its credit action analysis. "However, in contrast to the situations in other states also struggling with delayed budgets, California's budget confrontation has also produced a cash shortage that may disrupt normal state and local government operations."
Moody's threatened "further revisions to these ratings" if the state fails to take necessary action to assure timely payments of all debt obligations, including lease debt.
About $3 million in state lease obligation debt service is due Aug. 1, followed by $109 million on Sept. 1. California has not yet made a provision for those debt service payments because there is no budget, Moody's said.
Market traders had been expecting a downgrade in recent weeks, but anticipated the rating to drop even lower.
Some market players argued that prices of California bonds are likely to remain unchanged or to improve as the market adjusts to the better-than-expected news.
A West Coast trader said the move to Aa would have little impact on prices, noting that the news alleviated concern that the state would suffer tougher rating consequences.
But others were more cautious, noting that the state faces a difficult economic situation and that harsher rating moves could come from other rating agencies.
News of the downgrade reached the market late in the session, and there was very little activity involving California bonds. California GOs have been trading around 6.25% for longer bonds.
Standard & Poor's Corp. rates California's general obligation bonds AA, and Fitch Investors Service rates them AA-plus. Officials at both rating agencies said they are closely monitoring California's budget situation.
"We have no specific date" for any credit action, Steve Zimmermann, managing director of Standard & Poor's, said last week. "We want to take action based on a budget. But we want to see something solid, not just smoke and mirrors."
The budget impasse and a cash crisis forced the state on July 1 to begin issuing promissory notes to pay its bills for the first time since the Great Depression. Most banks have said they will honor the warrants until the end of July.
Formally called registered warrants, the IOUs carry a 5% interest rate and replace state checks to cover payroll, personal income tax refunds, and other bills. The state treasurer has said California could issue 811,000 registered warrants, totaling more than $2 billion, in July alone.
State officials remain deadlocked over ways to bridge California's estimated budget gap, which totals $11 billion for the 18-month period which began last January and extends through June 1993. The shortfall is $8 billion if certain cost-of-living increases are excluded.
Gov. Pete Wilson last Friday unveiled a $40.1 billion general fund spending plan, including cuts of $2 billion for schools and $2 billion in reductions for health and welfare programs.
But bi-partisan budget commissions over the weekend rejected nearly all the Republican governor's proposed cutbacks, including reductions in programs for the elderly, the homeless, and people with AIDS. Republicans, meanwhile, joined Democrats in turning down a plan that would delay certain four-year-olds from entering kindergarten on time this fall.
Most controversial is the governor's proposal to cut schools by an estimated $2 billion. Democrats have advocated a plan which would reduce education funding by much less.
The Democrats' plan includes a proposal to use a number of one-time measures, such as delaying pension fund payments, to save funds. Their proposal would also eliminate key agencies and commissions such as the Commission on the Status of Women, the Fair Employment and Housing Agency, and the California Arts Council.
Legislators met in Sacramento yesterday in another attempt to reach a compromise.
Franz Wisner, spokesman for the governor, said it was "anyone's guess" as to when a budget would be passed. He said the downgrade action by Moody's was not "unexpected."
"A downgrade is just one more reason why Assembly Democrats should do what others have done and act on the governor's proposal," he said.
When asked about possible political fallout from the downgrade, the IOUs, and the failure of California lawmakers to achieve a budget, Mr. Wisner said, "The governor has been handed these problems. Nobody puts the blame on his shoulders."
Local governments remain concerned about California's budget problems because they fear revenue cutbacks will be part of the state's deficit solution.
For example, California ports and various maritime interests have lobbied intensely against proposed legislation that would siphon off certain port revenues to help balance the state budget.
Senate Bill 1565 could require ports located on state tidelands to pay 50% of their "excess revenues" to California's general fund.
Standard & Poor's said last week that it "views this proposed legislation negatively."
The rating agency said the legislation could limit the financial flexibility of ports and possibly impair their ability to fund capital programs.
If SB 1565 becomes law, Standard & Poor's said it will place affected ports on CreditWatch with negative implications, "pending a determination of the bill's long-range impacts."
Major ports facing possible impact from the bill include those in Los Angeles, Long Beach, and Oakland.
Port officials reported progress over the weekend in convincing legislators to drop language affecting port revenues. But they cautioned against claiming final victory, noting that many proposals remain on the table in connection with the state's complex budget negotiations.