California's GO Bond Rating Cut By Fitch

Photo by: Thierry Golden Gate Bridge

Fitch Ratings cut its rating on California's long-term general obligation bonds Monday to "BBB," two notches above speculative grade, citing the state's budget and cash crisis.

The credit ratings agency also kept the debt of the most populous state on watch for additional downgrades. In a statement, Fitch said it cut its "A-" rating "based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis."

California faces a $26.3 billion budget deficit for its fiscal year that began on July 1.

Talks between Governor Arnold Schwarzenegger and lawmakers to balance the state's books are plodding along as state finance officials began issuing IOUs promising payments to taxpayers owed refunds to preserve the state's dwindling cash for priority bills, including payments to investors holding the state's debt.

"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 ratings agency said California needs a balanced budget agreement quickly because it will need to sell short-term debt for cash-flow purposes once it has a spending plan.

"With issuance of IOUs for non-priority payments, margins for meeting constitutional and court-required contractual commitments are narrowing," Fitch said.

"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," Fitch said.

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