Bangkok--20 Jun--Standard & Poor's
California's budget situation remains in flux following Governor Jerry Brown's veto of the main budget bill sent to him by the legislature on June 15. The budget package passed by the legislature and vetoed by the governor does not affect the rating on the state (A-/Negative). As Standard & Poor's Ratings Services understands it, the package he vetoed would have relied on a variety of one-time revenues, payment deferrals, more favorable revenue assumptions, and spending reductions to eliminate the remaining $9.6 billion projected budget deficit through fiscal 2012. The governor had already rejected some of these proposals earlier this year because they faced legal challenge or the administration did not view them as viable ways to close the state's funding gap. In our view, by vetoing the main budget bill, the governor leaves open the possibility of achieving improved structural alignment between the state's revenue and spending while avoiding adding to the $34.7 billion in budget obligations identified in the governor's May revision to his budget proposal (see "California Budget Revision Employs New Tactics In Pursuit Of Fiscal Remedy," published May 19, 2011 on RatingsDirect on the Global Credit Portal). Thus far in the budget negotiation process, political agreement among legislators and the governor has proved elusive on fiscal and policy matters we consider key, such as temporary tax extensions, pension reform, and a stricter spending cap or "rainy day" fund mechanism.
Although the governor's veto risks a protracted budget negotiation process that we believe could stress the state's cash position, it is not clear to us that the budget package he vetoed would have averted cash problems. Our analysis of a revenue anticipation note (RAN) offering in the context of a budget balanced with nonstructural and legally questionable solutions would consider the state's ability to retire the RANs under a stress scenario in which some of the assumed revenues or cuts did not materialize as cash or cash savings. However, the state forecasts revenues, as of the May revised budget proposal, to be $2.8 billion above the governor's January budget proposal through fiscal 2011. And recent tax revenue collections were 5.9%--or $408.3 million in May--above that assumed in the May revised budget proposal. Together, this $3.2 billion in additional revenue should bolster the state's cash position we believe. Without an enacted budget, however, which precludes the state from issuing its RANs on the public debt markets, it is unclear to us at this time how long the state's cash collections will allow it to fully fund all of its payment obligations. Without the RAN proceeds, we would expect at some point in the summer that the state controller would engage more aggressive cash management measures (such as deferring non-priority payment obligations or issuing registered warrants). As in recent years, the threat of protracted budget negotiations extending into the new fiscal year could, therefore, undermine the state's liquidity and continue to exert downward pressure on the state's credit rating.
Media Contact:
Edward Sweeney, New York (1) 212-438-6634,
[email protected]
Analyst Contacts:
Gabriel Petek, CFA, San Francisco (1) 415-371-5042
David G Hitchcock, New York (1) 212-438-2022