State’s Rating May Plunge if Bond Fails

Moody’s bond rating agency warned Tuesday of serious consequences if voters reject Gov. Arnold Schwarzenegger’s $15-billion borrowing proposal on the March 2 ballot.

If the bond measure is rejected, a report issued by the firm says, the state could “tumble into a liquidity crisis” soon after.

“The state’s cash position is highly stressed,” says the Moody’s Ratings Update, noting that California needs the money from the bond to pay off $14 billion in short-term loans coming due in June. “The assumed issue of long-term deficit bonds is central to the state’s plan to remain solvent in the near-term.”

On March 2, voters will decide the fate of four ballot issues, including two that would clear the way for the governor’s plan to help balance the state budget by borrowing $15 billion.

Public opinion polls so far show weak support for the plan. Officials from the governor’s office quickly seized on the Moody’s report as evidence of the need to restore the state’s fiscal health.

The three-page document supported warnings made earlier in the day by state Controller Steve Westly, who was campaigning for Propositions 57 and 58, the ballot measures that voters must approve to authorize the bond sale.

“If Propositions 57 and 58 don’t pass and we run out of money in June as we’re on track to do, you’re likely to see another bond downgrade or two,” Westly said. “That could take us to junk bond status.”

Moody’s stops short of an outright prediction that such a downgrade would occur, but warns that it would be very challenging for the state to hold on to its current Baa1 rating -- already the lowest of any state in the country.

The doom and gloom scenarios are not new. For the last few weeks, Schwarzenegger and others have been warning of the consequences if the bond does not pass. But a recent survey by the Public Policy Institute of California found that only 35% of likely voters are inclined to cast their ballots in favor of it.

The Moody’s report outlines the challenges for the state if the bond is voted down.

It suggests that California would immediately be at the mercy of the banks to which it owes the $14 billion in June. The state would have the option of postponing those payments, but the “terms are onerous and potentially disruptive, and could place the required repayment of the banks in direct competition with provision of state services,” according to Moody’s.

Moody’s also warns that there “is considerable uncertainty regarding the legal validity” of a backup bond that legislators approved last year and are hoping to rely on to keep the state from running out of cash in the event the Schwarzenegger plan is rejected March 2.

During a lunchtime town hall inside the auditorium at Monroe Clark Middle School in City Heights, Schwarzenegger and Westly highlighted one area that would face cuts if the propositions don’t pass: education. They trumpeted the endorsement of the 300,000-member California Teachers Assn. U.S. Sen. Dianne Feinstein (D-Calif.) also endorsed the measure this week.