SACRAMENTO – A credit rating agency on Friday questioned whether California will be able to raise $4 billion by selling bonds, just days before state officials planned to start offering them for sale on the market.
Standard & Poor's Ratings Services placed California's bond rating on negative credit watch, citing concerns over the state's ability to access short-term financing.
“The (credit watch) placement reflects Standard & Poor's concerns over the ability of the state, as a result of recent market conditions, to successfully access the short-term market to meet its pressing cash flow needs,” according to the agency's ratings report.
Normally, the state has no problem selling notes to pay for operating expenses in the first half of the fiscal year until tax revenues come in the spring. Last year, California took out $7 billion in short-term loans to cover operating expenses. It needs to raise a similar amount this year, starting with the $4 billion offering.
But turmoil on Wall Street has put a squeeze on the credit market. State and local governments are now having to pay higher interest rates than normal, and California may have to do the same, said David Hitchcock, senior director at Standard & Poor's.
“If they can't access the market, then they'll have a cash shortfall in November without making administrative changes,” Hitchcock said.
The state controller has already projected California could run out of cash at the end of October if it does not take out short-term loans.
State officials said Friday that they remain optimistic they can sell $4 billion worth of notes next week despite the credit rating agency's report. Gov. Arnold Schwarzenegger has begun appearing in ads airing in San Francisco and Los Angeles urging Californians to buy the notes.
“We remain cautiously optimistic that we will have a successful sale next week,” said H.D. Palmer, a spokesman for the Department of Finance. “Once that's completed, we look forward to S&P taking away the credit watch.”
State Treasurer Bill Lockyer plans to start offering the bonds for private sale next Tuesday and Wednesday, then open the sale to institutional investors on Thursday.
Schwarzenegger has sent two letters to U.S. Treasury Secretary Henry Paulson about California's fiscal situation. He initially warned that California may have to turn to the federal government for a $7 billion loan if it is unable to secure routine loans in the private market.
In a letter Thursday, he expressed optimism about the credit climate after Congress passed a $700 billion Wall Street bailout package and the Federal Reserve cut interest rates. Schwarzenegger said he was encouraged by news from other states, such as Massachusetts, which was able to secure $750 million in short-term notes Wednesday.
California's fiscal health continued to deteriorate just weeks after state leaders ended the longest budget stalemate in state history by closing a $15.2 billion deficit with a combination of cuts and accounting maneuvers. This week the state treasurer estimated that state revenues are likely to drop another $3 billion below projections.
