State credit rating the worst among the 50 states

The state of California, unable to produce a balanced budget on time and now facing a $42 billion hole over 18 months, had its credit rating downgraded by Wall Street to the lowest level among the 50 states. The move is latest in a series of bleak fiscal events facing the strapped state.

The decision by Standard & Poor’s, which among other things assesses the creditworthiness of governments, means that the state will be forced to pay more when it borrows money. S&P downgraded the state’s bonds from “A-Plus” to an “A” rating. Most states are rated “AA” or “AAA.”

Also this week, unions appealed a court’s decision upholding Gov. Schwarzenegger’s order requiring forced furloughs for state employees. The first “furlough Friday” starts tomorrow; the next will be Feb. 20, and continue on alternate Fridays through mid-2010, pending changes in the state’s financial picture. Another major labor leader urged Democrats – traditional allies of labor – not to weaken worker protection in order to carry votes for a state budget.

Until the downgrading, California had been rank of “A-Plus” put the state at the same level as Louisiana, making the two states with the worst credit rating in the nation; S&P’s latest action puts California below Louisiana.

S&P’s lowered credit rating affects some $46 billion in voter-approved General Obligation bonds. The GO bonds typically are viewed as among the safest investments because they are backed by the state’s general fund and paybacks are required by law.

S&P said its decision reflected  “our view of the lack of political progress around the budget negotiations that we believe is serving to exacerbate the state’s current and projected cash position.”

The assessment is just the latest in a series of fiscal blows suffered by the state, stemming largely from the weakening general economy. The dismal financial situation has been aggravated by the failure of the governor and Legislature to balance the state’s books. The core issue: Republicans oppose raising taxes to get new moneny for the state, and Democrats oppose deep cuts in programs.

Gov. Arnold Schwarzenegger, meanwhile, proposed a mix of cuts and taxes that included raising the statewide sales tax and cutting the school year by a week.

The governor and Legislature failed to negotiate a timely budget for the current, 2008-09 fiscal  year, and when they did finally produce a budget last fall – the deadline was July 1 — it was immediately out of balance. Since then, the state’s financial picture has worsened.
The governor, overcoming legal hurdles, has ordered two Fridays of forced furloughs each month for state employees, a move Gov. Schwarzenegger says will save the state state some $1.3 billion. Unions representing state workers said the order was illegal, amounting to a 9.5 percent pay cut that had not been negotiated at the bargaining table.

Union leaders, traditionally allies of Democrats, believe that Democrats may agree to deep workplace cuts in order to get a budget through the Legislature. Democrats control both houses but lack the two-thirds majorities required to approve a budget. Any budget must have bipartisan agreement, and so far that has been lacking.

“Some legislators may consider sacrificing key policy positions including labor protections – such as the eight-hour workday, meal breaks, prevailing wages, etc.  – as a condition of gaining Republican votes,” Bob Balgenorth, president of the Building and Construction Trades Council, wrote lawmakers. “Repealing them now to buy Republican votes would be a major injustice.”

“If Republicans learn that they can leverage Democrats into abandoning worker protections, they’ll soon launch a full-scale assault on all labor standards including prevailing wages and every other policy issue that they are unable to change through the normal legislative process.”

Implied in the unions’ position was the threat of retaliation against Democrats who vote against the unions’ desires. Many Democrats won election to the Legislature with union backing.

Two unions representing state employees – the Professional Engineers in California Government and the California Association of Professional Scientists – challenged an earlier Superior Court judge’s ruling that upheld the administration’s right to order forced furloughs for 240,000 state workers. State Controller John Chiang, an independently elected Democrat, allied himself in court with the unions.