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MOODY'S LOWERS STATE OF CALIFORNIA GENERAL OBLIGATION BOND RATING TO 'Aa' FROM 'Aa1'; LEASE-SUPPORTED RATINGS REVISED FROM 'Aa' TO 'A1'

 MOODY'S LOWERS STATE OF CALIFORNIA GENERAL OBLIGATION BOND RATING TO
 'Aa' FROM 'Aa1'; LEASE-SUPPORTED RATINGS REVISED FROM 'Aa' TO 'A1'
 NEW YORK, July 6 /PRNewswire/ -- On July 1, having failed to enact a budget for the new fiscal year, the State of California began issuing scrip to its creditors. The budget delay and the use of scrip mark a critical juncture for the state's credit standing. In February, Moody's lowered the state's general obligation bond rating from "Aaa" to "Aa1," citing institutional constraints and economic vulnerabilities. However, the "Aa1" rating also anticipated that the state would continue to manage its finances in a manner consistent with its historic record of prudent and effective fiscal control. The breakdown in the budgeting process that has created the current cash shortage marks a departure from that management record, Moody's said today. Moody's is now lowering the state's general obligation rating from "Aa1" to "Aa" and the ratings on its lease-supported obligations from "Aa" to "A1." The ratings remain under review pending further budget developments.
 While general obligation debt service is constitutionally protected in California, lease payments require specific appropriations. Unlike other states that have enacted special lease appropriation legislation when their budgets were delayed, California has not yet made provision for appropriation authority to service this debt in the absence of a budget. Approximately $3 million in lease-supported debt service is due on Aug. 1, followed by $109 million on Sept. 1. Failure by the state to take necessary interim steps to assure timely lease payments, should budget stalemate persist, could result in further revisions to these ratings.
 The current cash crisis reflects the depletion of the state's reserves, a consequence of the weakening economy and a failed budget negotiation strategy. During June the state took a number of steps designed to force the adoption of a budget by July 1, including a political decision to sell revenue anticipation warrants in an amount sufficient only to pay obligations through the end of the 1992 fiscal year. The warrant offering also provided sufficient cash to meet July 1 general obligation debt service, and to fund the 1992 TRANs maturing June 30, 1992. Had the state chosen to sell a larger amount of revenue anticipation warrants, an option that could have been pursued as late as the last week of June, the current cash shortage could have been averted. Instead, the state had to begin paying most creditors with scrip in order to preserve enough cash to meet constitutionally protected debt service and education payments during July. Major banks in the state have agreed to honor the scrip as cash for a limited period of time. Should the budget stalemate continue, the next critical point will be reached when the banks are no longer willing to play this role. Thus, the threat of illiquidity failed as a lever to pressure decisionmakers into a timely budget, and in fact now leaves the state with even fewer budget options.
 The legislature and the administration are now grappling to close an $8.1 billion budget gap for fiscal year 1993, caused in large part by the impact of persistent economic weakness on spending demands and on revenues. Employment levels are stagnant and the unemployment rate is now among the highest of the large industrial states. Fiscal leaders have resolved to address the budget without tax increases, yet the ability to make cuts of the amount needed is constrained by the state constitution. A resolution to the current budget impasse is not yet in sight.
 Under other circumstances, a delayed budget need not lead to a rating revision. However, in contrast to the situations in other states also struggling with delayed budgets, California's budget confrontation has produced a cash shortage that may disrupt normal state and local government operations. As the budget impasse continues, failure to take actions necessary to assure timely payment of all of its debt obligations, including lease-supported obligations, could result in further revisions to these ratings.
 Debt affected by rating revisions:
 Gross general obligation debt outstanding $16.06 billion
 Appropriation or lease-backed debt outstanding $2.88 billion
 State of California Lease Obligations
 The ratings on those series listed below have been revised from Aa to A1. Those marked with an (x) have been revised from Conditional (Aa) to Conditional (A1).
 State of California Board of Public Works Lease Revenue Bonds
 Corrections
 Southern Maximum Security Complex Dated 12/1/85
 Amador Prison dated 5/1/86
 Del Norte Prison dated 2/1/87
 Madera Prison dated 10/1/90
 1991 Series A (State Prison - Imperial County) dated 11/1/91(x)
 Higher Education
 California Community Colleges 1991 Series A, dated 8/1/91(x)
 California State University:
 1986 Series A Lease Rental Bonds (Long Beach Facility)
 1986 Series A Lease Rental Bonds (San Luis Obispo Facility)
 1986 Series A Lease Rental Bonds (San Jose Facility)
 1990 Series A Lease Rental Bonds (Library Facilities)(x)
 1992 Series A (Various California State University Projects)(x)
 State of California High Technology Facilities (The Regents of
 the University of California)
 1986 Series A (Irvine Facility)
 1986 Series A (San Diego Facility)
 1987 Series A (Santa Barbara Campus Engineering Facility)
 1988 Series A (Berkeley Campus Life Sciences Facility)
 1990 Series A (Various University of California Projects)(x)
 Other
 Energy Efficiency Revenue Bonds, Series 1991 A
 Energy Efficient Revenue Bonds dated 6/1/86
 1991 Series A (Franch Tax Board Central Office Project -
 Phase II)(x)
 Franchise Tax Board Refunding Certificates of Participation dated 7/1/89
 San Francisco State Office Building -- Certificates of Participation dated 5/1/86 3
 Los Angeles State Office Building Authority -- DGS Lease Revenue Bonds dated 2/1/88 3
 Department of Transportation to the East Bay Building Authority, Certificates of Participation, Series 1991 A and B(x)
 Ratings on the following derivative products, which rely on the state's general obligation bond pledge, have been changed to reflect the rating revision.
 State of California Floating Rate Trust Certificates (Relating to the State of California General Obligation Bonds Dated 2/1/91, due 2/1/06) (SBPA -- Societe Generale)
 Municipal Receipts (Relating to the State of California Various Purpose General Obligation Bonds Dated 3/1/92, due 9/1/09
 Custodial Receipts
 Series BT-14 (relating to the State of California Various Purpose General Obligation Bonds due 2/1/03 (Tender Agreement -- Bankers Trust)
 Series BT-16 (Relating to the State of California Various Purpose General Obligation Bonds due 2/1/03) (Tender Agreement -- Bankers Trust)
 Series BT-17 (Relating to the State of California Various Purpose General Obligation Bonds due 2/1/03) (Tender Agreement -- Bankers Trust)
 Muni Raes
 Series 18 (Relating to the State of California 10 percent Various Purpose General Obligation Bonds due 4/1/07)
 Series 19 (Relating to the State of California Various Purpose General Obligation Bonds due 4/1/07)
 Series 21 (Relating to the State of California Various Purpose General Obligation Bonds due 4/1/10)
 Series 22 (Relating to the State of California Various Purpose General Obligation Bonds due 1/1/06)
 Series 24 (Relating to the State of California Various Purpose General Obligation Bonds due 11/1/10)
 Series 27 (Relating to the State of California Various Purpose General Obligation Bonds dated 8/1/91, due 9/1/11)
 Series 33 (Relating to the State of California Various Purpose General Obligation Bonds dated 10/1/91, due 10/1/11)
 Series 34 (Relating to the State of California 7.2 percent Various Purpose General Obligation Bonds dated 10/11/91, due 4/1/08)
 Municipal TIGRS Series AH (Relating to the State of California Various Purpose General Obligation Bonds due 8/1/10)
 Municipal TIGRS Series AJ (Relating to the State of California Various Purpose General Obligation Bonds due 9/1/00)
 Municipal TIGRS Series AM (Relating to the State of California Various Purpose General Obligation Bonds due 2/1/10)
 -0- 7/6/92
 /CONTACT: George Leung, 212-553-0342; Renee Boicourt, 212-553-7162; or James Dearborn, 212-553-1910, all of Moody's/ CO: State of California ST: California IN: SU: RTG


GK-LS -- NY068 -- 6813 07/06/92 19:02 EDT
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