Another Drop in State Credit Rating Feared

Moody’s Investors Service said Friday that it is considering a further downgrade of California’s credit rating in the aftermath of the Sept. 11 terrorist attacks and amid a political squabble that is threatening repayment of the state budget for billions spent this year on electricity.

The announcement by Moody’s--one of the two major Wall Street rating agencies that downgraded California’s general obligation bond rating earlier this year because of the energy crisis--indicates that the state’s increasingly precarious fiscal position is causing greater concern in the financial community.

The Moody’s review affects $31.6 billion in state debt, including $5.7 billion in revenue anticipation notes that the state recently borrowed to help cover costs through this budget year.

If California’s bond rating, currently at Aa3, according to Moody’s, is lowered further, the state could wind up paying tens of millions of dollars more in interest on its debt.

The state budget is in trouble for two reasons, Moody’s said.

First, the economic effect of the terrorist attacks on state revenue--and the deteriorating economy in general--have caused a sharp decline in anticipated revenue.

The state budget was based in part on the expectation of tax money coming in from people cashing in stock options and reaping gains from stock sales that now may not happen.

The state expected 16% of general fund money this budget year to come from stock-related tax revenue, and, although it set aside a $2.6-billion reserve in case of problems, that may not fill the gap left by diminishing stock returns.

Making matters worse is the hangover from the electricity crisis. To avert blackouts, California this year spent more than $6 billion to buy electricity that the debt-laden private utilities could no longer afford to purchase for their customers.

Under a plan approved by Gov. Gray Davis and the Legislature, the budget was supposed to be reimbursed for the power buys through a record $12.5-billion bond sale. Utility ratepayers were then to repay the bonds as part of their power bills.

But the energy bond deal--the largest in American history--has run into a series of procedural and political obstacles, and it is in limbo.

The California Public Utilities Commission, which oversees utility rates in the state, shot down a rate agreement this week that was needed to proceed with the bonds. The panel’s decision stemmed from a larger political dispute with Davis over the financial costs of the state’s response to the energy crisis. No backup plan is in place.

State Treasurer Phil Angelides, who is in charge of the bond issue, initially estimated that it would take place as early as last spring, but recently declared that it will not occur this year because of the squabble. If it does not happen soon, he warned, California will have a hole in its next budget as large as $10 billion, requiring major cuts in government services.

State officials Friday said they were not surprised by the quick response from Wall Street. Davis had earlier called the PUC’s failure to let the bond deal move forward “an irresponsible act,” and state officials warned of financial fallout.

“Our first reaction is, ‘We told you so,’ ” said state Department of Finance spokesman Sandy Harrison. “We’ve been saying the PUC’s action was irresponsible, that it was going to affect the budget and our credit rating, and unfortunately it looks like we were right.”

The Moody’s analysis warns of the consequences of not resolving the current problems.

“Should revenue collections fall below estimates and outstrip the budget reserve,” Moody’s said, “the state would be forced to seek legislative authorization to implement significant spending limitations.”