Credit Agency Lowers State’s AAA Ranking : Finance: Standard & Poor’s cites deficit, budget problems. The result will mean higher borrowing costs.

A major Wall Street credit agency downgraded California’s prized AAA credit rating to AA on Friday, expressing alarm over the state’s “chronic deficit operations” and its inability to overcome budget problems.

Standard & Poor’s Corp., one of the nation’s major bond-rating firms, added that it saw no quick relief for the state, predicting California “will be operating at a substantial deficit at least through fiscal 1993.”

The bond ratings are used by investment firms to calculate the interest the state will have to pay on its long-term borrowing. State Treasurer Kathleen Brown said the action by Standard & Poor’s will increase the cost of state borrowing and could lower the value of California’s $9.4 billion in outstanding general obligation bonds held by investors by $122 million.

Brown and other state officials sought to downplay the impact of the action, noting that the state’s financial health is fundamentally sound and that two other prominent rating agencies continue to rank California bonds at the top AAA rating.

Gov. Pete Wilson and Democratic legislative leaders used the announcement to continue their contentious exchange over who is to blame for the lack of action to counter the growing deficit in the current year’s $55.7-billion budget. Although the state is facing a deficit of between $5 billion and $7 billion that has prompted widespread alarm, the officeholders have been unable to even begin negotiations.

The governor told reporters during a Capitol news conference that legislative leaders “are not prepared to come to grips with reality. They are simply not ready to do the . . . admittedly difficult things. No one enjoys making some of the spending cuts that we are going to be compelled to make.”

In response, Senate President Pro Tem David A. Roberti (D-Los Angeles) again criticized Wilson for urging that a deficit-reduction package include elimination of an income tax credit that was given to renters as part of a property tax relief package.

Roberti, in a statement released by his office, said, “When there is a budget plan that is fair, comprehensive and does not penalize California renters, then the Legislature has reason to return to Sacramento.”

Assembly Speaker Willie Brown (D-San Francisco), in a statement, said the downgrading of the bond rating “is in direct response to the governor’s failure to produce a real solution to a very real budget problem.”

Wilson said he believes the credit downgrading will generate support for an initiative he unveiled this week that would cut aid to poor families and give him broad emergency budget powers whenever state revenues drop or expenditures exceed budgeted amounts by a cumulative 3%.

Richard Larkin, a Standard & Poor’s official, said the fighting between Wilson and Democratic leaders played “an important part” in the credit downgrading.

“Our biggest concern is that there is no indication that anything serious was going to happen that would produce serious proposals to deal with this deficit. A lot of people are talking about it, but no one really is coming forward to deal with it,” Larkin said in a telephone interview from his New York City office.

In downgrading the state, Standard & Poor’s said in a press release that “Proposition 98 education funding pressure, rising social service cost pressures, and the substantial tax increases enacted last July have reduced the state’s ability to take timely corrective measures as budget gaps develop for the second consecutive year.”

California began the 1980s with a AAA credit rating, saw it drop twice in the financial upheaval caused by the property tax-reduction measure Proposition 13. It bounced back to AAA in 1986.

Larkin said it appears too late for the state to avoid another major deficit in the 1991-92 budget year. Pointing out that a deficit was carried over from last year’s budget, Larkin said carrying forward deficits “is not consistent with an AAA rating.” Larkin said an AA rating is “a pretty good rating.”

California’s downgrading leaves only six states left with a AAA rating, Larkin said. The treasurer’s office said that at least eight states, including California, have had their credit ratings lowered by one of the three national credit rating agencies during the last 12 months.

Officials from two other rating agencies, Moody’s Investors Service and Fitch’s Investors Service, said they will keep California at the AAA rating, though they are looking hard at state finances.

While Treasurer Brown said the downgrading could reduce the value of California’s outstanding bonds by $122 million, investors would lose money only if they sell the bonds before they mature.

The treasurer told reporters in San Diego that the lower bond rating would have “absolutely no impact” on her plans to sell $11 billion in bonds over the next three years to finance state public works projects. She said a one-tenth of 1% increase in interest costs on the $11 billion would add $159 million over the 20-year life of the bonds--or about $8 million a year.

“It would be a grave mistake to pull back on our commitment to invest in schools, roads and other capital needs. In this recession, it is an important opportunity to prime the economic pump that we sell bonds to build public works to put real people to work building real schools, universities and transit systems, so they can pay real taxes,” she said.

Brown, interviewed before attending a legislative hearing in San Diego, called the downgrading “unwarranted, given California’s long-term strength.”

Times staff writer Chris Kraul contributed to this story from San Diego.