Bond Raters OK State’s Borrowing
Wall Street bond ratings released Thursday cleared the way for state government to borrow $11 billion and hobble through summer without going broke -- but they also contained fine print that lawmakers were advised to consider.
The message: Get your fiscal house in order or we won’t be there for you next time.
Top finance officials say the state has never in recent history been on such shaky financial footing. The possibility of running out of money and losing access to the markets has become very real.
Now, all three major bond rating houses in New York have made it explicitly clear that California was able to secure the needed top-tier rating on the $11 billion in loans only by paying a consortium of large banks $84 million to essentially piggy-back on their credit standing. If the state’s fiscal problems persist, even that might not be an option next time.
Consider the rating from Moody’s Investors Service. A half-page of detailed small print comes under the heading “Significant Uncertainty Surrounding Fiscal 2003-2004 Cashflows.”
The rating agencies took pains to warn prospective investors of all the uncertainties California faces as lawmakers struggle to close a $38-billion budget gap.
The agencies advised that if the state does not adopt the governor’s revised budget -- which includes $8 billion in new taxes and rolling over $10.7 billion of the shortfall through borrowing -- or some variation that does as good a job bringing the state’s finances in order, paying them back could be a problem.
“This represents the end of the runway,” state Controller Steve Westly said in reaction. “What it means is should the state wish or need to do borrowing in the future and these things have not been accomplished, there will not be other avenues open.”
Three bankers and financial consultants to the state who would speak only on the condition of anonymity expressed concern about the failure of the Legislature to be jolted by similar past messages from Wall Street.
“We could easily go down the tubes,” said one, who pointed out that Democrats’ insistence on saving the social safety net and Republicans’ insistence on no new taxes could quickly become irrelevant if they lead to the state’s loss of borrowing ability.
“We will have dismantled the social system and it won’t matter if we raise taxes; it will all be over.”
Yet lawmakers appear nowhere near consensus on the governor’s proposed budget or on any other plan to deal with fiscal problems. With the July 1 constitutional deadline for approving a spending plan quickly approaching, lawmakers appear no closer to reaching a deal than they were six months ago.
Westly said it didn’t help matters this week when Senate Republican Leader Jim Brulte of Rancho Cucamonga warned all the Republicans in the Legislature that if they vote for a tax increase, he will work to end their political careers. Brulte even showed them an example of a political advertisement he would send out.
“There is a time and a place for partisan politics, and this is not it,” Westly said. “If the partisanship goes on, the state will, in fact, run out of money.”
Brulte says he was merely trying to stop the majority Democrats from buying off the few Republican defectors they need to pass a budget, as Democrats have in years past with jobs or promises of approval of pet legislation.
Some lawmakers are expressing concern that the failure of both sides to meet halfway could result in the kind of “get out alive” budget that was approved last year.
That spending plan relied heavily on transfers, deferrals and other accounting maneuvers and quickly fell out of balance after it was approved.
State Finance Director Steve Peace said falling back on such tactics again would be extremely ill advised.
“We’ve pretty much played our last cards,” he said. “Wall Street will be waiting very carefully to see what kind of decisions are made.”
Raymond Murphy, a senior credit officer with Moody’s, made clear that one option not available to California is avoiding hard budget choices by simply assuming that the economy will recover next year and tax receipts will surge.
“The state really can’t, and we don’t anticipate will, build a budget on the assumption of an economic rebound of any significant magnitude during fiscal 2004,” he said.
As negotiations on spending remain stalled, one budget action was pushed through by Assembly Democrats late Wednesday. It was a bill by Assemblyman Mark Leno (D-San Francisco) that would allow local governments to impose an income tax to preserve local services, if such a tax is approved by 55% of voters. “By giving local governments and voters choices, local budgets won’t have to be balanced on the backs of critical services,” Leno said.
Republicans and taxpayer groups criticized the measure, calling it a slippery slope that would result in a major financial burden for the public.
They also questioned the legality of the proposal, and suggested that such tax money could end up paying for services that cities cannot fund legitimately with income taxes.
