LOS ANGELES - Standard & Poor's Corp. yesterday lowered its rating on California general obligation bonds to A-plus from AA, reflecting the failure of lawmakers to pass a budget and severe cash-flow problems.
The downgrade marks the first time the agency has placed California's GO credit rating in the single-A levels, according to a Standard & Poor's official.
The downgrade affects $13 billion of outstanding general obligation debt.
The rating agency yesterday also lowered ratings on state lease-backed financings, including California State Public Works Board leases for the California State University and University of California. Some of the lease ratings fell as low as BBB-plus-provisional, from A-provisional, due to the state's reduced credit quality.
California lawmakers have failed to reach a budget agreement for the fiscal year, which began July 1. The state is daily issuing promissory notes, know as registered warrants or scrip, to make payroll and other bills. As of June 13, the state had issued $507 million of warrants.
"This action reflects the magnitude of the state's cash-flow problems, the issuance of scrip and the fact that it's gone on this long," said Richard Larkin, managing director of Standard & Poor's Corp., when asked why the state's rating was not dropped only one notch, to AA-minus. "The state's finances have deteriorated and there is no end in sight."
News of the downgrade had no immediate impact on prices of the state's bonds. But traders said that once the market digested the news, prices could suffer.
"The news is just hitting the Street, but the downgrades, especially on the public works bonds, was greater than people expected," a trader said. "They're two weeks into the budget impasse and nobody's done anything about it, and that air of complacency is something to worry about. You could see people start to sell it on that basis."
The state's long-term paper was trading in the 6.20% range prior to the downgrades.
Some California debt was not affected by yesterday's action. Double-A ratings were affirmed on $3.2 billion of general obligation bonds payable from the Veterans Farm & Home Building Fund, based on the fund's insulation from state cash flow shortages. Double-A ratings on $1.2 billion of Water Resources Development bonds remain on CreditWatch, with negative implications, pending further review.
On July 7, Moody's Investors Service lowered its rating on California general obligation bonds to Aa from Aa1, after lawmakers failed to reach a budget agreement. Fitch Investors Services currently rates California GOs AA-plus.
Standard & Poor's, in its credit action, noted the failure of lawmakers to address a deficit approaching $4 billion for the end of fiscal 1992. and said "without action the deficit could double in 1993, representing nearly 20% of general fund spending."
The downgrade prompted state Treasurer Kathleen Brown to call on Gov. Pete Wilson to immediately reconvene leadership budget meetings.
"We are in a ratings free fall," said Ms. Brown. "As California enters its 16th day issuing IOUs, there is now an alarming yet understandable lack of confidence in California's ability to manage its finances."
The rating agency said the A-plus rating reflects "a lack of confidence the state would not experience a replay of recent events in the future." It also said the likelihood that any new budget would "continue to rely on one-shots and accounting changes that will continue to keep the state's cash operations in a weak position for years."
Mr. Larkin said the agency had hoped to see a budget before taking credit action, but the budget delay forced the agency to act. He said the credit trend for the state is now "stable," but said analysts will continue to monitor the situation.
The rating agency said the California economy is experiencing severe stress that is likely to continue for at least the next year.