State’s credit rating could be hurt by budget impasse

SACRAMENTO -- A major Wall Street rating agency warned Friday that the state budget impasse, now well into its second month, could trigger a downgrade of California’s credit rating.

“California is now the last state without an enacted budget,” a report issued by Standard & Poor’s states.

The agency warned that if the impasse extends into September, it threatens to cause “serious disruption to state government and state-funded institutions that could affect economically important services.”

The agency also warned that school districts and local governments, which are not getting scheduled state payments, could get hit with rating downgrades if the budget impasse is not broken soon.

California has not faced a downgrade of its credit rating since just after Gov. Arnold Schwarzenegger took office in the fall of 2003. At that point, the rating hovered around junk status in the midst of a multibillion-dollar budget crisis.

It has since bounced back up to A+, a level that no longer threatens California’s ability to borrow but remains the second-lowest rating of any state. Only Louisiana is rated lower.

“It’s another indication there is a price to be paid for delay and inaction,” said H.D. Palmer, a spokesman for the state Department of Finance.

“If this budget goes unresolved past Labor Day, it suggests we are looking at potential for adverse action from Wall Street. That is on top of the hardship already caused by our inability to pay healthcare and child-care providers.”

The state deadline for passing a budget was July 1. But lawmakers remain deadlocked after Republicans in the Senate refused to sign off on a bipartisan budget plan approved by the Assembly last month.

The Assembly budget closely resembled the spending plan proposed by Schwarzenegger. The GOP lawmakers in the Senate, however, are calling for more spending cuts and a softening of environmental regulations.

A drop in the state’s credit rating could cost California hundreds of millions of dollars. It would signal to investors that the risk of the state missing a payment on the bonds it sells has increased, forcing the state to pay higher interest rates.

The Standard & Poor’s report says that the risk of a downgrade would increase substantially if a budget is not in place by Sept. 5, which was the date the budget was enacted in 2003, the latest California has ever gone without one.

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evan.halper@latimes.com