Moody Upgrades California’s Credit Rating

Published July 1, 2004

California Governor Arnold Schwarzenegger (R) is on a roll. Not only has he won praise from taxpayer advocates by achieving a no-new-taxes budget, but his actions have been rewarded by the financial community as well: Moody’s Investment Services has upgraded the state’s credit worthiness.

Reported the Sacramento Chronicle on May 22, “California’s shoddy credit rating received its first boost in four years [on May 21], as Moody’s upgraded the state’s credit rating one notch a week after Gov. Arnold Schwarzenegger released his revised budget.” Moody’s is one of the nation’s major credit rating agencies.

Schwarzenegger did not hesitate to express his appreciation for the upgrade–and to remind state policymakers the next move is theirs. “Today’s upgrade by Moody’s is fantastic news,” he said in a statement to the press. “Their financial analysts have had a chance to carefully review our revised budget and our economic outlook, and they’ve concluded that it warrants an improvement in California’s standing in the nation’s financial markets. I appreciate their strong vote of confidence in the new direction that we’re taking California.

“However,” continued Schwarzenegger, “they are staking this vote of confidence on our ability to approve this budget. We should now return the favor by doing the right thing, and that is for the Legislature to get this balanced and responsible budget passed on time. … I ask the Legislature to work with me and with each other to make this happen–and to show the people that we’re continuing to work together to keep California moving forward.”

The governor released his revised state budget on May 13. The $102.8 billion two-year plan calls for fewer across-the-board spending cuts than his original proposal, and relies more on borrowing, one-time savings, and money from the federal government. The new plan, coupled with an improving economy, is expected to bring in more tax revenues and cut the state’s budget deficit, without a general tax increase.

“I am determined to protect essential services, not only for this generation of Californians but the next generation as well,” Schwarzenegger said when announcing his revised plan.

Schwarzenegger hopes to see the revised budget implemented by July 1, the first day of the new fiscal year. “The people are tired of the summer slamfest in the Capitol,” he said. “I am proud, and I’m all pumped up, and I’m ready.”

Schwarzenegger said it will take “more than one year to right the state’s fiscal ship,” acknowledging in an interview with Sacramento Bee columnist Dan Weintraub that “gimmicks” are an integral part of his current budget proposal.

“Of course I couldn’t cut $15 billion. It’s too much,” Schwarzenegger said. “So what we had to do is cut half of that, then support it with gimmicks that the previous administration used because I could not perform a miracle and say, ‘Let’s just produce $15 billion out of the air without raising taxes.'” The governor has held firm in his no new taxes pledge.

Moody’s upgrade of California’s credit rating from Baa1 to A3 reflects the “state’s improving economy and the governor’s move toward a budget that may pass muster with the Legislature,” said Renee Boicourt, director of the Public Finance Group at Moody’s. “While the budget isn’t done, we see the May proposal as more politically viable than the earlier (January) proposal,” she said.

Moody’s said voter approval in March of $15 billion in deficit bonds “significantly improved the state’s fiscal outlook.” Passage of the bonds allowed the state to pay off short-term borrowing due in June.

Moody’s also noted, however, that the prospect of “continuing deficits remained the state’s primary concern.

“The budget’s structural imbalance situation represents a significant ongoing fiscal challenge for California and is a primary reason for the still quite low bond rating relative to other states,” the Moody’s report concluded.

John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].