Bloomberg reports that California Credit Rating Cut Close to Junk After IOUs.
(emphasis mine) [my comment]
California Credit Rating Cut Close to Junk After IOUs
By William Selway
July 6 (Bloomberg) -- California's credit rating was cut for the second time in as many weeks by Fitch Ratings after a stalemate over how to close a $26 billion budget deficit forced the most-populous U.S. state to pay some bills with IOUs.
Fitch lowered its rating of California's general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high-risk junk ratings, and said the state may be cut further. The credit-rating company last lowered its assessment of California on June 25.
California, the largest issuer of municipal bonds, last week began issuing IOUs for the second time since the Great Depression as Governor Arnold Schwarzenegger and lawmakers remained deadlocked over the budget cuts needed to make up for revenue lost because of the recession. California Controller John Chiang said the step was needed to conserve cash.
"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," Fitch said in a statement.
California, with the world's eighth-largest economy, was already the lowest-rated U.S. state. Standard & Poor's gives the state it's A grade, the sixth-highest of 10 investment levels. The firm reaffirmed that assessment on July 1. Moody's Investors Service rates the debt A2 and placed it on watch on June 19.
The Fitch action affects $79 billion of debt -- $69.3 billion of general obligation bonds, rated BBB, and $9.7 billion of appropriations credits, rated BBB-.
Real Estate Bust
California, where the high cost of real estate fueled demand for adjustable-rate mortgages that helped trigger the recession, has been especially affected by the slump. Six of the state's cities are among the 10 with the highest foreclosure rates in the U.S., according to RealtyTrac, an Irvine, California, company that keeps data on repossessed homes. The state's unemployment rate of 11.5 percent in May was the fifth-highest in the U.S.
The disappearance of jobs and spending cutbacks by consumers has sapped the sales and income taxes that fund state government. Revenue collections dropped by $13 billion to $73 billion in the 11 months through May from a year earlier, according to Democratic Controller John Chiang's office.
Fitch said its rating reflects that there is little risk of a default by California [This is why Fitch ratings are more or less worthless]. Officials including Treasurer Bill Lockyer have repeatedly said the state won't default.
"The 'BBB' rating indicates that expectations of default risk remain low, although the rating is well below that of most other tax supported issuers," Fitch said.
The Wall Street Journal reports that Big Banks Don't Want California's IOUs.
JULY 7, 2009
Big Banks Don't Want California's IOUs
By RYAN KNUTSON
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.
Dorothy Cottrill of the state controller's office inspects IOUs last week.
The development is the latest twist in California's struggle to deal with the effects of the recession. After state leaders failed to agree on budget solutions last week, California began issuing IOUs -- or "individual registered warrants" -- to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July's end.
But now, if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2 [Another reason why the dollar might run into trouble at the end of September.], or find other banks to honor them. When the IOUs mature, holders will be paid back directly by the state at an annual 3.75% interest rate. Some banks might also work with creditors to come up with an interim solution, such as extending them a line of credit, said Beth Mills, a California Bankers Association spokeswoman.
Meanwhile, on Monday morning, a budget meeting between Gov. Arnold Schwarzenegger and legislative leaders failed to produce a result. Amid the budget deadlock, Fitch Ratings on Monday dropped California's bond rating to BBB, down from A minus, the latest in a series of ratings downgrades for the state.
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.
Mercury News reports that California leaders in no hurry to break budget impasse.
California leaders in no hurry to break budget impasse
SACRAMENTO — Despite plunging tax revenues, Wall Street's unwillingness to loan the state money and billions of dollars worth of IOUs hitting mailboxes, California's leaders are displaying a seeming lack of urgency to close the state's $26.3 billion deficit.
Gov. Arnold Schwarzenegger and legislative leaders blew past a supposedly ironclad June 30 deadline to pass a new budget, and no one can say with any precision when the new moment of truth is, if there is one. Each side seems to be waiting for the other to blink. The question now hovering over the impasse: How long can this last?
Based on projections of the state's financial outlook by Controller John Chiang, the answer may be several more weeks, if not months. That's when he projects the state will finally run short of cash to make legally mandated payments to schools and bondholders; the crunch would have come even sooner had Chiang's office last week not resorted to IOUs to lower-priority creditors like vendors.
An extended delay would come at a huge cost to California's prestige, possibly sending its credit rating into junk-bond territory and driving an untold number of companies that rely on state money out of business.
"We're in deep trouble in September, if not sooner," Chiang said in an interview Tuesday.
Lengthy budget stalemates happen so frequently here that they are almost ingrained in the Capitol's DNA. But despite this summer's mammoth problems — and a looming deadline from the state's largest banks to stop cashing IOUs after Friday — it's looking like business as usual, with political leaders blaming one another for the standoff.
If the stalemate drags on past the summer, the state could be in jeopardy of missing required payments to schools or even defaulting on bonds — although officials insist they will do everything in their power to avoid missing a debt payment for the first time in state history.
"That would be like jumping into Death Valley," Chiang said.
Chiang said the state can probably make it until September without jeopardizing those legally mandated obligations by continuing to issue IOUs ["Probably"? So the world's sixth largest economy will "probably" not default on its debt? How reassuring]. Chiang plans to issue $3.4 billion worth of the notes this month, and billions more in August if a budget deal isn't reached.
Fitch Ratings, which downgraded California's credit rating on Monday, estimated that so-called priority payments to schools and bondholders wouldn't be at risk until late October. Further credit downgrades would make it even harder — and more expensive — for the state to sell bonds to pay for schools, roads and other infrastructure.
No sign of a deal
Although budget negotiations are fluid, a deal to solve the deficit doesn't appear imminent. This week, Assembly Speaker Karen Bass, D-Los Angeles, threatened to boycott negotiating sessions with Schwarzenegger, saying he isn't serious about reaching a deal. The governor, in turn, blames what he calls intransigent Democrats for not being willing to make adequate programs cuts and farther-reaching reforms to fix the state's repeated deficits.
Schwarzenegger last week called an emergency session of the Legislature to address the budget. But that declaration gave lawmakers 45 days to act before they're legally precluded from working on anything besides the budget.
Meanwhile, IOUs continue to go out to vendors and taxpayers across California.
The notes can't be cashed until Oct. 2, except in cases where a recipient's bank agrees to honor them sooner. California's four largest banks have agreed to do that — but only through Friday — to give state leaders a window to solve the deficit.
It is far from clear, however, that top banks' refusal to honor the notes after Friday will be enough to prod the Legislature to a deal. Neither the two Democratic leaders nor a spokesman for Schwarzenegger could name a hard deadline for getting a budget agreement done.
"As far as I'm concerned, we've passed the deadline," Bass said recently. "I don't know what to tell you."
What's more, every day that elapses without a deal means another day the state has to pay bills based on the budget legislators passed in February — a budget that quickly fell out of balance because of plummeting tax revenues. Legislators have proposed various savings measures to help bridge the shortfall, but the longer it takes to enact those savings, the less time there will be for them to take effect.
By the end of July, the state will have missed $800 million in potential savings lost to the simple passage of time. That will force legislators to cut even deeper to make up the difference.
Barbara O'Connor, director of the Institute for the Study of Politics and Media at Sacramento State, said she sees a "critical window" over the next week or 10 days for state leaders to close on a budget agreement.
Leaders and rank-and-file members, she said, are under enormous competing pressures — on one side from a public fed up about yet another drawn-out budget impasse, and on the other side from special interests and constituents angry about looming cuts to their programs. [The path of least resistance (which politicians love to take) is to do nothing until California eventually defaults.]
If the end of next week passes without an agreement, "then it could go on until September," O'Connor said. And "the longer it goes on, the harder it will be to get it resolved."
Humor about California's IOUs
The huffingtonpost reports that California Cancels 2010.
July 8, 2009
California Cancels 2010
Editor of satirical news site The National Protrusion.com
[This satire, not real news]
Sacramento, CA - California Governor Arnold Schwarzenegger announced that his state will not participate in the year 2010, and instead "will skip directly to 2011." California faces a projected $26.3 billion budget deficit, and the state's controller began handing out IOUs last week.
Gov. Schwarzenegger held a press conference, following an emergency meeting with key staff and several members of the State Senate. The governor said that at that meeting, it quickly became clear that there was no alternative to canceling the upcoming year.
"The fiscal emergency we now face is even worse than we had anticipated," the governor said, reading from a prepared statement. "We have decided the best option is to sit this year out, and pick up again in 2011. Hopefully, after that amount of time, and with the money we save by not participating in 2010, we'll be back on solid financial footing and we can return to the greatness that we Californians are known for. Until then, bear down and try to get through the rest of 2009. Because after that, you can sit back and relax. You won't be doing anything for a while."
All state services will cease to operate, all state employees will be laid off, according to Mr. Schwarzenegger.
"As far as California is concerned, there will not be a 2010. It does not and will not exist," he said. "If you try to call the police or the fire department, know that they will not be coming to help you. If you want a traffic light fixed, it may be time to take out your tool set and get to work with some handy friends. On the upside, you will not have to feed parking meters, and you won't be receiving any traffic tickets. If I were you, I would save that money, because you'll probably need it to pay for tutors for your children who won't have a public school to attend. But there's another upside for you kids: no school!"
Mr. Schwarzenegger said he regrets that his state will not be able to participate in 2010, as it "looks like it will be a pretty good year," but he said he's confident that 2011 will be a great one for California.
"I hate for my state to miss out on 2010," the governor said, "But I know that when we pick up again in 2011, we will be doing it with renewed vigor and energy and commitment. 2011 will be a great year for all Californians, at least the ones who don't rely on the state for any essential services, as those people probably won't survive 2010."
[Although this story is satire, there is a ring of truth to it. After California defaults, a lot of state services will cease to operate...]
My reaction: All is not well in California.
California issues IOUs
1) California, the largest issuer of municipal bonds, last week began issuing IOUs for the second time since the Great Depression.
2) California's four largest banks said they would stop accepting California's IOUs on Friday
3) if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2
4) California plans to issue more than $3 billion of IOUs in July.
5) State Controller John Chiang said that without IOUs, California would run out of cash by July's end.
California's credit rating downgraded
1) California's credit rating was cut for the second time in as many weeks by Fitch Ratings after the most-populous US state started issuing IOUs. The Fitch action affects $79 billion of debt.
2) California, with the world's eighth-largest economy, was already the lowest-rated U.S. state.
3) Further credit downgrades would make it even harder - and more expensive - for the state to sell bonds to pay for schools, roads and other infrastructure.
California's economy is imploding
1) Six of the state's cities are among the 10 with the highest foreclosure rates in the U.S.
2) The state's unemployment rate of 11.5 percent in May was the fifth-highest in the U.S.
3) Revenue collections dropped by $13 billion to $73 billion in the 11 months through May from a year earlier.
No deal to solve the crisis appears imminent
1) California's leaders are displaying a seeming lack of urgency to close the state's $26 .3 billion deficit.
2) Gov. Arnold Schwarzenegger and legislative leaders blew past a supposedly ironclad June 30 deadline to pass a new budget.
3) every day that elapses without a deal means another day the state has to pay bills based on the budget legislators passed in February
4) By the end of July, the state will have missed $800 million in potential savings lost to the simple passage of time.
5) California's leaders and rank-and-file members are under enormous competing pressures from:
A) A public fed up about yet another drawn-out budget impasse
B) Special interests and constituents angry about looming cuts to their programs.
6) If the stalemate drags on past the summer, the state could be in jeopardy of missing required payments to schools or even defaulting on bonds
Conclusion: California is experiencing a meltdown. Tax revenues are plunging. Its credit rating is being rapidly downgraded. Wall Street is unwillingness to loan the state money. Billions of dollars worth of IOUs are hitting mailboxes...
Despite California's rapid descent into the abyss, politicians appear committed to the path of least resistance, which involves doing nothing until California eventually defaults. Considering that a Californian default would undermine all other US government obligations and that the treasury needs to sell 3.3 trillion debt in the second half of 2009, this is not going to have a happy ending.