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Fitch Downgrades State Of California To 'bbb'

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Fitch Downgrades State of California GOs to 'BBB'; Maintains Rating Watch Negative

By: Business Wire | 06 Jul 2009 | 03:49 PM

NEW YORK, Jul 06, 2009 (BUSINESS WIRE) -- Fitch Ratings has downgraded the state of California's (the state) long-term general obligation (GO) bond rating to 'BBB' from 'A-'. The bonds remain on Rating Watch Negative. The rating action affects the state's GOs and lease appropriation and related bonds as detailed at the end of this release.

The downgrade to 'BBB' is based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis. Since no agreement was reached by the June 30, 2009 fiscal year (FY) end, the state's controller has now begun issuing registered warrants (IOUs) for certain non-priority payments to preserve cash, and the budget gap to be addressed has increased to $26.3 billion from $24.3 billion. The use of IOUs for non-priority payments would offset cash shortfalls into September 2009 as now currently projected.

The Rating Watch Negative reflects the short-term risk, in Fitch's view, that institutional gridlock could persist, further aggravating the state's already severe economic, revenue and liquidity challenges and weighing on the state's credit. Resolution of the Negative Watch will depend on actions taken to address the cash flow imbalance. The 'BBB' rating indicates that expectations of default risk remain low, although the rating is well below that of most other tax supported issuers. GO debt in California has a constitutional prior claim on revenues, although after education; appropriation debt has a lesser legal claim, but the controller prioritizes payment directly after GO debt service, ahead of other mandatory payments.

With issuance of IOUs for non-priority payments, margins for meeting constitutional and court-required contractual commitments are narrowing. After September 2009, absent any proposed budget and payment adjustments, cash deficits will expand dramatically. Cash flow solutions, including the ability to access short-term borrowing, are inextricably tied to reaching timely agreement on effective and credible budget solutions.

The state's budget revision released in May had forecast a $24.3 billion budgetary gap through June 30, 2010, the end of FY 2010, before proposed solutions; $3.1 billion of proposed solutions were in FY 2009, with the remainder in FY 2010. By failing to reach agreement prior to June 30, 2009, the end of FY 2009, a portion of the $3.1 billion in proposed FY 2009 budgetary solutions has been forfeited; notably, such solutions would have alleviated the cash flow stress forecast in the early months of FY 2010 by reducing or deferring scheduled statutory disbursements, primarily to education. Moreover, under the state's constitutional spending formula for education, foregone FY 2009 proposed solutions lead to higher required spending in FY 2010 and beyond, and pushed the FY 2010 baseline budget gap to $26.3 billion.

The inability of the state to reach agreement has prompted the controller to begin issuing IOUs for non-priority payments, primarily disbursements to vendors, for certain social services, and for tax refunds, in order to ensure payment of priority payments, including GO and lease debt service. The controller's office estimates that $3 billion in IOUs will be issued during July 2009; priority payments of $10.8 billion will be made for education, debt service, Medicaid, payroll, pensions and other mandatory contractual obligations. Projections will be revised to reflect June revenue performance and other changes but as currently estimated, cumulative cash deficits of $3.7 billion are projected through August, offset by $4.5 billion in non-priority payments that could be covered with IOUS, excluding tax refunds. However, by the end of October, the projected cash deficit expands to $16.1 billion, well beyond non-priority spending of only $10.6 billion, excluding tax refunds.

Today's further downgrade to 'BBB' on Rating Watch Negative affects GOs, GO veterans, economic recovery and Cal-Mortgage Loan Insurance Division bond ratings.

Moreover, the following appropriation bonds of the state are also downgraded to 'BBB-' on Rating Watch Negative: --Public Works Board (except for those issued for the Regents of the University of California); --East Bay State Building Authority; --Los Angeles State Building Authority; --Oakland State Building Authority; --Riverside County Financing Authority; --Sacramento City Financing Authority; --San Bernardino Joint Powers Financing Authority; --San Francisco State Building Authority; --Golden State Tobacco Securitization Corporation (series 2005A); --California Infrastructure and Economic Development Bank state school fund apportionment lease revenue bonds; --California Judgment Trust; --Shafter Joint Powers Financing Authority; --Taft Public Finance Authority.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

http://www.cnbc.com/id/31766287/site/14081545

Yet another downgrade. :ph34r:

Edit: Forgot link.

Edited by MOP

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i still find it incredible that despite all the money thrown at Golem Sachs et al, an entire state is having to resort to IOUs

time to fire up the Municipal Intervention Liquidity Fund

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i still find it incredible that despite all the money thrown at Golem Sachs et al, an entire state is having to resort to IOUs

time to fire up the Municipal Intervention Liquidity Fund

Did you just make that up?

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i still find it incredible that despite all the money thrown at Golem Sachs et al, an entire state is having to resort to IOUs

time to fire up the Municipal Intervention Liquidity Fund

That's er... MILF for short. They pay MILFs with IOUs in Ca. The bastards!

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sorry MOP, i derailed your thread a little with mooses..

if, as Bloomberg claims, the late market surge today was on the back of a ratings upgrade rumour concerning Brasil, what will the market make of this? over on TF they're calling 'poop shoots'

California’s Nightmare Will Kill Obamanomics

I really don't know what it might do. The market jumps up on the smallest crumb of news and then trys to ignore the bad stuff. It's still detached from reality. For now.

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The ratings agencies are worth their weight in gold (sorry) er..... dollars.

You get a "bbb" for paying your debts in..... IOU's.

Do you think the gumment will give me a "bbb" for paying my tax with them too?

Edited by Dubai

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Surely the rating agencies should have downgraded California several years ago if they really do have crystal balls rather than waiting until it's obvious that the state will collapse and then downgrade.

It's a bit like doing the odds for the horse race when the race has finished.

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It takes years and years to make a mess as terrible as the California debacle, but the recipe is simple. All that you need is two political parties that are always willing to offer easy government solutions for every need of the voters, but never willing to make the tough decisions necessary to finance the government largess that results. Voters will occasionally change their allegiance from one party to the other, but the bacchanal will continue regardless of the names on the office doors.

California’s Nightmare Will Kill Obamanomics

Sound familiar? UK PLC is doomed :ph34r:

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The ratings agencies are worth their weight in gold (sorry) er..... dollars.

You get a "bbb" for paying your debts in..... IOU's.

Do you think the gumment will give me a "bbb" for paying my tax with them too?

+1

WTF???

The personal equivalent would be Sir Digby Chicken Ceasar

S'aright madam - sent the bill to my Gentlemans club for reimbursement!

MADNESS

Edited by sbn

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According to the WSJ, banks are having a change of heart on accepting California IOUs.

A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

[...]

The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

http://online.wsj.com/article/SB124692354575702881.html

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