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Credit Rating Is Latest Worry for California "The concern is that they'll take the easy way out by not cutting spending or increasing revenues enough to cover the shortfall and instead will borrow their way out of their problem and hope that economic growth will bail them out," said David G. Hitchcock, a state credit analyst at Standard & Poor's who has been following California finances for more than a decade. "That would not be a good development from a credit perspective," Mr. Hitchcock said. "But it is a sovereign state and it is in their own hands." He said that if the budget impasse lasted into August, the state might be unable to make payments to local governments and community colleges or meet other obligations. It has basically exhausted its ability to issue short-term notes and is operating on the proceeds of revenue-anticipation bonds issued in June. But Mr. Hitchcock also expressed the belief that California's deep and diverse economy and progressive income tax structure would eventually pull the state out of its quagmire. Phil Angelides, the California treasurer, said in a telephone interview that the warnings from the ratings agencies were a symptom of the state's problems, not the cause. "Clearly what they're concerned about is the deep partisanship reflected in the recall movement and the budget stalemate, which are creating political paralysis with financial implications," said Mr. Angelides, a Democrat. Mr. Angelides said that a one-notch downgrade would mean $400 million in additional interest costs on $24.6 billion of general obligation bonds that have been authorized but not issued over the 30-year life of the loans. While governors and legislators across the country are struggling with the effects of the economic slowdown, the problem has not quite reached the proportions of the recession of the early 1990's, credit analysts say. Since February 2001, when the high-technology bubble began to deflate, Moody's has downgraded eight states a total of 11 times, including California three times and Tennessee twice. In the recession of the early 1990's, Moody's downgraded nine states a total of 11 times. Currently, Moody's has 15 states on a list with a negative outlook. Two of them, California and Michigan, are also on Moody's watch list, which means there could be a ratings downgrade within 90 days. Michigan has an Aaa rating, the highest possible. Karl Jacob, a director in the state and local government group at Standard & Poor's, said the states' fiscal distress had been deeper and longer than anticipated. Tax revenues and others have not rebounded as quickly as state officials have hoped. Several states, including Massachusetts and Connecticut, were hurt by recently enacted tax reductions, further cutting into anticipated revenues and making it harder to balance their budgets. But the problem has been moderated in part by reserves accumulated in the economic boom of the latter half of the past decade. The National Governors Association calculated that the states had total year-end balances of $49 billion in 2000. California had $9.4 billion in reserves in June 2000, 18 months after Mr. Davis became governor, according to the State Department of Finance. It has none today.
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