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.
