California’s credit rating drops slightly

California’s credit rating was dinged Thursday by Standard & Poor’s, which cited the state’s worsening budget crisis.

The firm’s rating on $5 billion of short-term notes the state sold in October was cut one notch, from SP-1 to SP-2.

S&P; also warned that its A-plus rating on $46.6 billion of California general obligation bonds, which are long-term debt, might be lowered.

With the state already tied with Louisiana for the lowest credit rating of all the states, a downgrade would leave California alone at the bottom. (Most states are rated AA or AAA.)

S&P; said its actions “reflect our opinion of recent state cash projections that expect significant deterioration in California’s cash position.”

The state’s budget deficit now is expected to reach $14.8 billion in the current fiscal year if the Legislature fails to cut spending, raise revenue or both. And the budget gap could balloon to a stunning $42 billion by July 2010, The Times reported Thursday.

S&P;, however, is focused on the near horizon.

“Should the state not enact timely midyear budget gap closing measures by February 2009, or should the state’s cash position weaken significantly compared with recently revised state cash flow projections,” the rating firm warns, the ratings on California’s long-term debt could be lowered, S&P; said.

That could drive more investors away from California bonds, forcing the state to pay higher interest rates to borrow. Municipal bond yields in California and elsewhere have been surging in recent weeks as state budget troubles have deepened.

As for the prospect of borrowing to plug budget gaps, S&P; warned that without “meaningful budget adjustments on the revenue or expenditure side,” California may face “constrained investor appetite” for its short-term notes.

Demand wasn’t a problem for the $5 billion in short-term notes California sold in October, but the state was forced to pay relatively high interest rates on that money.

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tom.petruno@latimes.com