S&P zeroes in on California’s cash management

By Jim Christie

SAN FRANCISCO, March 30 (Reuters) – On the heels of
California’s governor halting state budget talks, Standard &
Poor’s said on Wednesday its low credit rating on the state
may be determined more by how the state manages its cash than
by any improvement in its overall finances.

The rating agency’s warning came quickly after Governor
Jerry Brown, a Democrat, said late on Tuesday he had called
off budget talks with Republicans in the Legislature’s
minority, underscoring the close attention Wall Street is
paying to the state’s budget politics.

California faces a budget shortfall of nearly $27 billion,
the biggest deficit of any U.S. state. Its leaders have so far
approved measures tackling roughly $11 billion of the gap.

The wobbly finances of state and local governments have
been weighing on the $2.9 trillion U.S. municipal debt market,
although U.S. Census data showed on Tuesday that state and
local finances are recovering after taking a severe beating
during the worst economic downturn since the Great Depression.

“Governor Jerry Brown’s announcement yesterday that the
fiscal 2012 budget negotiations have reached an impasse
suggests that our focus will remain trained on the state’s
fundamental cash and liquidity position,” S&P said in a

S&P added that its A-minus rating and negative outlook on
California’s general obligation debt will over the near term
be “characterized” more by the state government’s cash
management than prospects for “structural improvement” in its
finances as long as Brown’s budget plan is stalled.

“Extraordinary cash management actions such as certain
payment deferrals or IOUs might in our view again prove
critical to the state’s credit level if fiscal 2012 were to
begin without a budget in place,” S&P said.

California’s government temporarily issued IOUs in lieu of
payments in 2009 during a lengthy budget impasse to manage its
dwindling cash in order to pay priority bills, including
payments to investors holding the state’s debt.


Some in the state capital of Sacramento have raised the
prospect that IOUs may also be necessary this year if budget
politics drag on and endanger the state’s annual sale of
revenue anticipation notes.

California government uses proceeds from the notes to
finance its operations during the start of new fiscal years.
Under Brown’s budget plan, California would raise $10 billion
from a summer note sale.

“If the state is unable to enact a budget prior to the
start of the fiscal year on July 1, we expect its cash-flow
borrowing options to be complicated because it will be
precluded from publicly issuing revenue anticipation notes,”
S&P said.

Brown said on Tuesday he halted talks with Republicans
over the key part of his state budget plan, a proposed tax
measure that would ask voters to extend temporary tax
increases that expire this year to help plug the state’s
budget gap.

Brown said Republicans had complicated negotiations with
too many demands. He had been trying to convince them to join
with Democratic lawmakers to put a tax measure on the June

Brown gave no indication of what he would do next,
although he could try to push his plan for a referendum
without Republican support or he may opt for an initiative for
a tax measure for November. Alternately, Brown may, as he has
suggested, aim to balance California’s budget exclusively with
spending cuts.

“Although we believe the governor’s proposed budget for
fiscal 2012 could, if adopted, help improve what is currently
a severe structural misalignment between state revenues and
expenditures, his announcement confirms our previously
published view … that the plan faced material logistical and
political hurdles,” S&P said.
(Reporting by Jim Christie in San Francisco; Editing by Jan

S&P zeroes in on California’s cash management