CALIFORNIA BEGINS
THE PAINFUL ROAD TO RECOVERY
Holders of California bonds are resting a little easier now that
voters in that state have approved two ballot propositions designed
to begin the road to state fiscal recovery.
Proposition 57 calls for issuing $15 billion in bonds to fund the
state's immediate liquidity needs, while Proposition 58 will institute
needed budget reforms and a constitutionally mandated balanced budget.
As a result of the vote, Standard & Poor's placed California's
bond rating of "BBB" on CreditWatch with positive implications.
In making this move, S&P indicated that the state's rating is
likely to improve, depending on further actions taken to correct
its ongoing structural budgetary imbalance. Moody's affirmed its
"Baa1" rating on the state while changing the rating outlook
to "stable" from "negative." In doing so, Moody's
noted the strong 63% voter approval margin in favor of the deficit
bond recovery plan. Moody's also took note of the failure of Proposition
56 (not supported by the governor), which would have lowered the
legislative majority required for tax increases to 55%.
Debt still moderate
Although California's debt will increase substantially as a result
of Proposition 57, it will remain in the moderate range at $1,800
per capita.
Much work remains to be done. The bonds are expected to be issued
this spring and removes any doubt that the state will be able to
complete its expected rollover of $14 billion in cash flow notes
maturing in June. Larger challenges lie ahead, including actions
to close recurring budget gaps for 2005 and beyond, estimated at
$14 billion.
Gov. Arnold Schwarzenegger's plan, of which Propositions 57 and
58 were the first step, envisions billions of dollars in spending
reductions while raising fees at state universities. Many of these
cuts, especially for programs affecting social services and transportation,
are likely to be unpopular. Yet, the popular governor has now pulled
off an impressive feat and will have significant leverage over recalcitrant
legislators as they dive into budget details.
The skills used by Schwarzenegger to build a bipartisan coalition
in favor of the voter propositions will be needed to make the difficult
budgetary decisions that lie ahead. The propositions were general
in their application, requiring no sacrifice by voters, while budget
cuts are contentious, since they are specifically targeted with
consequences felt by everyday people.
We expect success
We believe that California's citizens have now spoken loudly twice
at the ballot box in favor of the governor's approach to restoring
fiscal balance without raising revenues. The road ahead will be
difficult, but we expect success in the end. We also see little
risk to holders of California's debt, now that immediate liquidity
issues have been resolved.
No state has defaulted on its general obligation bonds since the
1800s, and California has shown its intent to honor its obligation
to investors while it works out its budgetary problems.
03/08/2004
About Dr. Abrams
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