Fitch Rts $2B California GOs 'BBB'; Negative Watch Continues.

Business Editors

NEW YORK--(BUSINESS WIRE)--Feb. 10, 2004

Fitch Ratings has assigned a 'BBB' rating to $2 billion state of California various purpose general obligation bonds expected Feb. 19 through negotiation with a syndicate led by Goldman, Sachs & Co. and Stone & Youngberg LLC. The 'BBB' rating on $32.5 billion outstanding general obligations and the 'A' rating on $1.8 billion general obligation veterans bonds are affirmed. All of the ratings remain on Rating Watch Negative to indicate the potential for further financial deterioration. The new bonds will be due Feb. 1, with years of maturity and call details yet to be determined.

California's credit assessment reflects a budget gap of some $14 billion, budgetary solutions based on a deficit borrowing of $15 billion and other one-time measures that leave a continuing structural imbalance. A deficit financing in some form is important as $14 billion short-term notes are due in June and the projected own source cash position falls short by more than $6 billion. There are several uncertainties to present plans including the response to recommendations for expenditure reductions, the outcome at the polls for the deficit bonds and validation of a back-up deficit financing. Still, California's economy is stabilizing, with growth expected this year and revenues are exceeding estimates.

California's continuing financial problems are rooted in the unprecedented decline in personal income tax collections since fiscal 2001, further complicated by the effects of the recession and delayed recovery. In addition, the new administration taking office in November 2003 repealed the vehicle license tax, at an ongoing cost of over $4 billion annually, increasing the budget gap for fiscal 2005 to $14 billion. The executive budget proposes use of over $9 billion of the deficit bonds to clear the existing deficit, with the remainder available in future years to pay obligations incurred before June 30, 2004, as well as expenditure reductions, suspension of certain educational mandates and use of almost $1 billion bonds as part of pension reform. The use of non-recurring measures results in a structural deficit of perhaps $6 billion to be confronted in future budgets.

General obligation deficit funding bonds supported by a sales tax and a companion budget balancing measure will be on the March ballot and both must pass for either to be effective. Should passage not occur, the back-up plan is use of stand-alone sales tax bonds; those bonds are for a lesser amount, are not yet validated and might appear in contradiction of the electorate's intent. Another option could involve the use of refunding revenue anticipation warrants. The completion of a successful deficit funding will respond to the immediate liquidity problem presented by the maturing short-term notes and clear past liabilities but will be effective only if accompanied by measures to achieve ongoing current balance.

With the inclusion of outstanding short-term debt as a proxy for the deficit bonding, California's debt has increased by about two-thirds, to $52 billion, over the past year, excluding over $.5 billion bonds secured by tobacco settlement payments. Yet, the burden remains moderate at $1,539 per capita and 4.5% of personal income.