California’s credit rating, already the lowest among U.S. states, may be cut several levels by Moody’s Investors Service as government leaders seek ways to eliminate a $24 billion budget deficit.
The move would affect $72 billion of debt, Moody’s said in a statement today. California’s full faith and credit pledge is rated A2 by Moody’s, five steps above junk.
Standard & Poor’s put California on watch for a possible reduction earlier this week, and Fitch Ratings did the same thing May 29. The rating companies cited the most-populous state’s deficit -- more than 20 percent of the general fund -- and lawmakers’ inability to agree on how to close the gap.
“If the Legislature does not take action quickly, the state’s cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July,” Moody’s said in a report today. “Lack of action could result in a multi-notch downgrade.”
Earlier this week, Republican Governor Arnold Schwarzenegger said he would refuse to back any tax increase as Democrats proposed a budget that would raise $2 billion from cigarette consumers and oil companies to help the state deal with declining revenue. The veto threat signaled an escalating battle over the deficit just a month and a half before the most- populous U.S. state is forecast to run out of money to pay its bills.
“I don’t think I’ve ever seen the phrase multi-notch in a ratings write-up,” said Schwarzenegger’s budget spokesman H.D. Palmer. “It’s another clear warning from the financial markets that there will be costly consequences if the Legislature doesn’t’ quickly send the governor a budget plan that he can sign.”