Budget Critic Is Booster Too : California Treasurer Kathleen Brown Delivers Enthusiastic Sales Pitch to East Coast Investors

Making a sales pitch to a room full of East Coast investment executives, California Treasurer Kathleen Brown almost could have been mistaken Tuesday for a partisan backer of Gov. Pete Wilson’s new state budget.

“This is a budget which reflects a very conservative series of assumptions on the economy,” Brown told executives who will be deciding this week whether to purchase a $2-billion issue of short-term California debt for resale to their clients. “We do have a very realistic plan for amelioration of our accumulated deficit.”

As she greeted the executives from Merrill Lynch, State Street Bank in Boston and other investment firms after the session, Brown exhorted them to “sell, sell, sell.” Brown, a Democrat who is widely expected to run for governor next year, has been sharply critical of the $52.1-billion state budget brokered by Wilson and Sacramento’s legislative leaders, including Assembly Speaker Willie Brown (D-San Francisco).

But on Tuesday, she was playing the role not of potential gubernatorial candidate, but of chief saleswoman to Wall Street of the state’s notes, bonds and warrants.

Telling Wall Street that the state budget is a shambles would hardly be an effective marketing strategy.

In a May 31 column in The Times, Brown called the budget irresponsible. “Wilson relies on overly optimistic economic assumptions, which have bedeviled the state’s budget for the last three years,” she wrote of the plan.

Interviewed after her presentation Tuesday at the Downtown Athletic Club in Manhattan, Brown insisted there was no inconsistency between what she told investors and her criticisms of the new budget.

She did not emphasize the risks in her talk, but Brown mentioned her worries about the budget’s $1.7 billion in off-the-book loans to schools. She also noted that the Commission on State Finance, which she heads, says the risk of a revenue shortfall in the coming year is greater than the Wilson Administration officially acknowledges.

“I talked about all of my concerns,” she said.

Investment executives at the meeting said they expect strong demand from customers for California’s tax-exempt notes.

The state’s spending plan for the year that began July 1 calls for carrying over a $2.7-billion deficit into the next fiscal year--not including those loans to schools.

On her Eastern trip, which included a stop in Chicago, Brown is also meeting with the firms that issue all-important ratings on government bonds.

Moody’s, Standard & Poor’s and Fitch all are expected to issue ratings on the new short-term notes. And all are reviewing their ratings of California’s longer-term debt in the wake of the state’s continuing, severe economic downturn.

A downgrade in the long-term ratings would not only directly cost the state millions of dollars in additional interest, but also would indirectly raise the cost of borrowing for California counties and municipalities.

After a meeting with Fitch, Brown said she thought an overall lowering of the state’s AA long-term debt rating by that agency is unlikely.

“It seems to me that recent revenue estimates from California are more reasonable than in the last few years,” said Claire Cohen, chief California analyst for Fitch. But she added, “I think everybody would agree that the state economy hasn’t recovered.”

Brown said she was less sure what Moody’s will do.

George Leung, chief California analyst, confirmed that Moody’s is reviewing the state’s overall debt rating, but he declined to reveal the firm’s plans. Leung said he and other Moody’s officials questioned Brown about revenue assumptions in the state budget.

California’s Credit History

With the state hit hard by lingering recession, California’s credit rating has eroded steadily since 1989. Lower ratings mean the state must pay higher interest to investors when it sells bonds to build highways, schools and other projects.

A recent history of how Moody’s Investors Service--one of three prime rating agencies--has appraised the state’s credit-worthiness:

Date Rating Decision July, 1992 Downgraded: Aa1 to Aa February, 1992 Downgraded: Aaa to Aa1 October, 1989 Upgraded: Aaa from Aa April, 1980 Downgraded: Aa from Aaa

Source: Moody’s Investors Service.

Researched by ADAM S. BAUMAN / Los Angeles Times

Credit Comparison

Nearly half the states in the country--including California--have Aa bond ratings from Moody’s Investors Service. A state-by-state breakdown of credit ratings, from highest to lowest: Aaa: Georgia, Maryland, Missouri, North Carolina, South Carolina, Tennessee, Utah, Virginia Aa1: Maine, New Jersey Aa: Alabama, Alaska, Arkansas, California, Connecticut, Delaware, Florida, Hawaii, Kentucky, Illinois, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Texas, Vermont, Washington, Wisconsin A1: Michigan, Pennsylvania, Rhode Island, West Virginia A: Massachusetts, New York Baa1: Louisiana Note: Nine states are not rated by Moody’s Source: Moody’s Investors Services; Times reports Researched by ADAM S. BAUMAN / Los Angeles Times