Citing California's budget woes, including a $24.3 billion shortfall, Fitch Ratings said on Friday it affirmed the most populous US state's 'A' long-term general obligation debt rating, but warned of a possible downgrade. California already has the lowest general obligation debt rating of any US state and with its finances in turmoil can ill afford higher borrowing costs that would come with a downgrade.
Fitch revised its rating outlook to negative from stable, noting in a statement that it has "growing concerns with the state's widening budget and cash flow deficits" and that the state's numerous fiscal and cash-flow challenges through the coming budget year are key credit concerns.
Fitch added that California's current dwindling cash is a "pressing concern" and that it is uncertain the US government will provide some form of cash support to the state. Fitch stressed that state officials need to balance the state's budget quickly: "While there appears to be consensus for quick action by the legislature, should it be delayed or fail to materialise, further rating actions may occur."
"Maintenance of the 'A' rating will hinge on the state's ability to achieve and sustain cash flow and budgetary solutions in the context of the state's continued weak economic and revenue outlook," Fitch said. State officials share those aims, said Tom Dresslar, a spokesman for State Treasurer Bill Lockyer.
"We're focused on working with the governor, legislature and fellow finance officers to enact a credible budget quickly and complete the cash-flow borrowing we need as cheaply as possible for taxpayers," Dresslar said. Fitch's warning followed a briefing on Friday by state Department of Finance Director Michael Genest in which he outlined an additional $2.8 billion in spending cuts to help fill California's massive budget gap.
The additional cuts would tackle the $24.3 billion deficit the state Legislative Analyst's Office, a budget watchdog, says is facing the state, compared with the $21.3 billion gap Governor Arnold Schwarzenegger had forecast. Because revenues have been decreasing so much so fast, Schwarzenegger decided to adopt the bigger shortfall estimate to be prudent, Genest said during a conference call.
Spending cuts facing California would be "dramatic" and "traumatic," but cannot be avoided because revenues have dropped further in recent months than state officials had expected and because the state government's cash is falling fast, Genest said. "The governor believes that we have to keep up with these events," Genest said.
"We have to live within our means." State Controller John Chiang also warned of a looming cash crisis. In a letter to Schwarzenegger and top lawmakers, Chiang said that, if they fail to balance the state's books by mid-June his office may not be able to meet all of the state's payment obligations in late July.
"Our latest projections show that beginning on July 29, California will not have the cash needed to meet all of its payment obligations," Chiang said. "On that date, the state will be in the red by $317.1 million; two days later, on July 31, our cash deficit increases to a negative $1.02 billion."
To balance California's budget, Schwarzenegger has proposed pay cuts, furloughs and thousands of layoffs for state employees, sharp cuts to education spending, early release for prison inmates, eliminating the state welfare program for needy families and borrowing $2 billion from local governments, many facing big budget shortfalls of their own.
California's Democrat-led legislature has resisted the Republican governor's calls for spending cuts in previous years, but now lawmakers from both parties say an austere budget is inevitable - especially after voters last week rejected ballot measures with the potential to raise $6 billion for the state. One measure proposed extending tax increases.
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