S & P Drops State’s Bond Rating to A+

Saying the action reflected its “lack of confidence” in California’s fiscal management, a second major credit-rating agency on Wednesday downgraded its opinion of the state’s bonds.

Standard & Poor’s reduced its rating on California’s bonds by two notches, to A+ from AA, pushing it below 36 other states ranked by the agency. The change means that S & P now rates the bonds relatively lower than does Moody’s Investors Service, which on July 6 downgraded its rating of California bonds by one step, to Aa from Aa1.

The actions reflect the judgment that California bonds are a slightly riskier proposition. They will force the state to pay more interest to attract investors to new general obligation bonds, which pay for schools, prisons, roads and other infrastructure. They also inflict another setback on the state’s business climate, already battered by the long-running recession and concerns about costly regulation and red tape.

State Treasurer Kathleen Brown called the action by S & P--which until Dec. 13 had given California’s bonds its highest ranking (AAA)--”a disgrace” for California. “We are, I suspect--and fear--in a ratings free fall,” Brown said in a news conference in Sacramento.

Steven G. Zimmermann, a San Francisco-based senior vice president in S & P’s municipal finance department, said of the downgrading: “It’s very possible that this (budget impasse) will not be rectified in any short period of time. They (Gov. Pete Wilson and lawmakers) don’t seem to have the political will to keep the budget in balance.”

The state has been operating without a budget since July 1, the start of the fiscal year. Since then, the state has been forced to pay its bills by issuing, so far, $628.5 million of “registered warrants” or IOUs.

Zimmermann noted that the state last year resorted to accounting changes and one-time solutions that temporarily patched over problems but did nothing toward solving the state’s long-term problems of stagnating revenues and rapidly rising costs.

The lower rating, S & P said in a statement, reflects the “likelihood that budget-balancing solutions will continue to rely on one-shots and accounting changes that will continue to keep the state’s cash operations in a weak position for several years.”

Treasurer Brown spoke to reporters in Sacramento just after returning from New York where she attended the Democratic National Convention and also met with ratings agencies.

“I return to my state with the greatest concern for our future well-being,” she said.

Brown said S & P’s downgrading could cost taxpayers as much as $85 million in additional interest costs over the 20-year life of $10 billion in bonds that have been authorized but not yet issued. Likewise, Moody’s earlier rating reduction could cost another $113 million over the lifetime of those bonds.

S & P said the move will also affect $13 billion worth of state bonds already issued, if the holders of those bonds sell them rather than hold them to maturity.

A spokesman for Gov. Wilson said the governor was disappointed in the downgrading but that it was not “entirely unexpected.”

Groves reported from San Francisco, and Ellis reported from Sacramento.