Sunday, December 23, 2007

All Old New Again

State's bonds are downgraded again

California debt gets a worst-in-the-U.S. rating from Moody's.

By Dale Kasler -- Bee Staff Writer
Published 2:15 am PDT xxx, xxx 23rd, 200x

Unconvinced that California has solved its budget problem, a second Wall Street firm lowered the state's bond rating Monday.
This time the downgrade came from Moody's Investors Service, which chimed in the first day of business after Gov. Gray Davis signed the new state budget into law. Moody's action, coming two weeks after its rival Standard & Poor's issued a downgrade, reinforced California's plummeting standing on Wall Street as it prepares crucial bond sales to stay afloat financially.

Moody's said it was disappointed that the new budget leaves an $8 billion deficit into the next fiscal year, a gap that could top $10 billion if the state's economic forecasts don't prove true. Although it didn't mention the recall election, Moody's cited California's political gridlock and said "the state will have substantial difficulty closing this gap in the next budget cycle."

Moody's lowered California's bond rating a notch to a worst-in-the-nation "A3," or four notches above junk bond status. It had been "A2," tied with New York and Louisiana.

The downgrade will increase California's borrowing costs but it's not clear by how much. That's because Moody's was far gentler on California than was S&P, the other big Wall Street rating agency.

S&P, acting before the budget stalemate was broken, lowered California a resounding three notches July 24 to "BBB," or just two notches above junk status. S&P uses a different lettering system than Moody's.

Sorry to be such a one note blog recently but I think it is important to get this stuff out and on the record before the shitstorm. There's gonna be so much noise and spin that it will be important to have a roadmap and a feel for what will be tried and what will actually happen before the spin.

So, interesting. The story is already written, just cross out the name of the governor and the date for the next story. This plays out on the theme i've been pushing. California is out of tricks.

Update: Once again the old media is behind on the story LATimes excerpt;

The financial troubles of major bond insurers are rattling the municipal bond market, where about half the bonds issued in recent years have carried private insurance -- including in California.

If you own muni bonds, it might be wise to take a closer look at your portfolio to see how it could be affected by the insurers' woes. But there's a very good chance the bonds you hold didn't really need insurance in the first place, analysts say.

Many states and municipalities have long used private insurance as a way to enhance the appeal of their tax-free securities for investors -- turning, say, an A-rated bond into a AAA-rated one.

Now, Wall Street is worried about the health of the insurers that backed those gilded ratings because of the potential claims the companies face from insuring other bonds, particularly mortgage-backed securities.

"Their ability to meet their claims-paying obligations is being called into question," said Jon Schotz, co-founder of Saybrook Capital, a Santa Monica-based investment fund that focuses on muni bonds.

Some of these AAA insured double tax free munis are 3% trading at par. Any whiff of inflation and 80¢ is wishful thinking.


Lou Minatti said...

Sounds like Arnie should be recalled, along with the entire legislature. I read somewhere that spending is up 40% in California since the last crisis(?)

Since party affiliation is meaningless when it comes to budgeting, they should all be tossed out and stripped of any pension benefits.

Northern Renter said...

Wow. I murst admit that I hadn't realized just how bolloxed up Cal's finances had gotten. Is it lack of revenue or too much spending or both?


Rob Dawg said...

Yep, +40% in 4 years, bigger deficit, much bigger debt, unbelievably larger out year obligations and the biggest encumbrance; deferred infrastructure tops them all. Typically deferred infrastructure is an exponential cost curve. You can get away with 5-10% lifecycle deferment once but go beyond trying to get an extra 10% and you are looking at a minimum 25% increase (to 125%) in project costs. Trying for that next 5-10% equals 175% cost then triple up to as much as quadruple delaying any further. Think changing your oil but with far less margin for error.

Actually party does seem to matter in the Legislature. The Republicans held out for ~6b in cuts to the Democrat proposals. About half was posturing but there was some small but real restraint. Next month the Republicans will have a huge head start and a lot of public goodwill to burn in the fight. And fight it will be. About 2/3rds of the budget will have already been spent so $4b out of the remaining $40b looks like 10%, the number you've heard. Problem is 2/3rds of that is not even remotely touchable in the time remaining thus $4b out of $12b is a big deal. They'll close down a lot of Caltrans projects and 'fail to fund' some $1.2b in school supplements and they will defer a Calpers contribution calling it an accounting change. Of course a hiring freeze and negative attrition policy will be included. Oh, and delays in distributions of promised monies to counties and municipalites. I expect many of them will respond with 4 day work weeks and other savings measures.

This summer that all stops. I'm guessing May 1st. Wall Street better have its credit crisis under control by then because all that money I mentioned as delayed? Municipalities have been issuing COPs all year based on those being available. Some of them will have no choice but to default. it will start small, Corona maybe. A sewer bond serving an unbuilt subdivision that isn't being built. No residents, the builder in bankruptcy no State so they 'renegotiate.' By summer a new round of credit crisis is inevitable.

Rob Dawg said...

Let's be crystal clear here. California is swimming in taxes. CA is a very very high tax state and that on a generally high level of taxable economy. There is absolutely no shortage of funding. None and don't let anyone so much as suggest otherwise. I've seen it all. Educators claiming 28th in school spending. Bull, they don't count general obligation bonds that pay for infrastructure. They also don't ever seem to remember the educational outreach programs that fall under other spending categories or retirement benefits from off balance accounts.

California spends too much and makes promises it cannot keep.

Max said...

Of course a hiring freeze and negative attrition policy will be included. Oh, and delays in distributions of promised monies to counties and municipalites. I expect many of them will respond with 4 day work weeks and other savings measures.

We will also see special funds raided, the vehicle reg tax increased, and state asset sales. And, the scapegoating can begin. I'll get the list started:

-illegal immigrants
-state workers

Can you think of any others?

Rob Dawg said...

There is absolutely no stomach for raising taxes among those who's taxes would be raised. The pols may try but even if passed they won't get what they expect.

Akubi said...

What about these people who aren't paying property taxes on a $65 million home? While I appreciate the intention on the Mills Act, I'm curious how much revenue the state is losing from it. It seems it could use some review and more specific and reasonable parameters, i.e. NOT $65 million single family homes.

Edgar said...

Ha! Arnie = worst governor ever. I used to like arnie, but he is a maggot, just like all the rest. In fact, that's all he's ever wanted to be, a maggot. I find Schwarzenegger guilty of a wasted life.

Rob Dawg said...

Akubi, a billion dollars is freakishly large. If we were to collect a billion from $50 million houses that pay no taxes currently we would need 2000 of them. And a billion doesn't even cover the bar tab.

w said...

Total Recall 2?

Tom McClintock sure sounded like he knew what he was talking about when he was running for governor. But Arnold sure is exciting! He's a star you know. And he is rich so he knows a lot of stuff I don't.

Max, I think you may need to add Realtors and mortgage agents to the list. Their actions are too corollary to the problem.

Funny Circus Bears said...

Arnie has always fancied himself to be quite the psychological warrior, and yesterday's LAT gave us a good look at what his strategy will be in this budget battle:

Arnie: "Kahlifornia is in a financial crisis, but as promised I will NOT raise taxes. Instead, we have no choice but to fire teachers, close schools, and flood the land with released prisoners".

Plebes: "NO. PLEASE NO. We will gladly accept a tax increase to avoid that fate worse the hell."

Arnie: "OK, the people have spoken, and I give the people of Kahlifornia what they want, a tax increase."

Funny Circus Bears said...
This comment has been removed by the author.
sk said...

I'm a fan of LA - I call it my beloved LA which irritates my wife a little - and I have moved out - well duh! but I've been terribly disappointed with Arnie.

I LIKE that title - "Capital of the Third World" for LA as per a book of that name.

For a long time, for LA, the reality on the ground ( high Hispanic population) wasn't reflected in the elected vox pop which was an unholy alliance of anglos and blacks. That has changed but the vox pop has to recognize that 40% is still only 40%.

I really ask - Does LA want to be the capital of Mexifornia or the capital of the Third World ?

If its the first ok - but count me out. If its the second then reps have to look at how, good and bad, the fiscal policies have been in Thailand, Singapore, Vietnam, Taiwan, HK, India, Malaysia and of course CO, AZ, NV, OR, WA, Canada and of course Mexico and start hacking a vox pop that can handle those divergent sentiments. The main sentiment, usually, at the family level, in the Third World is "save a lot", "balance the budget", and "no funny accounting business".

It would be good if there's a resurgence of that idea. I wish it were so, but if wishes were fishes..


Akubi said...

Akubi, a billion dollars is freakishly large. If we were to collect a billion from $50 million houses that pay no taxes currently we would need 2000 of them. And a billion doesn't even cover the bar tab.
Yes, but let's assume we review all houses over $10 million dollars utilizing this write-off and not just the Mills Act, but other tax write-offs used by the accountants of the super-wealthy. We do have a lot of billionaires in California.
It doesn't in the least bit piss you off that owners of a $65 million dollar home pay less property taxes than you (assuming you’re not also benefitting from a similar loophole)?
While we’re on the topic of property taxes, I’d like to suggest scrapping the prop 13 disaster.
Anyway, I do agree with you that the healthcare boondoggle is a poorly timed fiscal disaster – and as politically incorrect as it sounds can’t understand why it is our problem to imprison and/or jail illegals. Why can’t we just deport them?

Lou Minatti said...

Total Recall 2?

I predict that will be a future headline.

Edgar said...


Edgar said...

BTW, CA could balance the budget overnight with just two simple words: legalize marijuana. Don't like the idea? Okay, fine, have it your way. :)

Bakersfield Bubble said...

Early indications are for sales tax receipts in the 4th qtr to be down 9-10% YOY. I am guessing this $14 billion dollar deficit will balloon to $18-20 billion before too long.

With real estate prices down 12% YOY, many will choose to have their recent albatross reassed to save a few coins. Add into increased debt costs, due to ratings downgrades...

w said...

This is purely anecdotal but...I work with many Hispanic foremen in my line of work. Every year many of them go to Mexico for a few weeks. This year I have been asking them during casual conversation when they are going to go. So far nobody has said they are going. Today it came up again, and I went for it and asked what was up with nobody going to Mexico. The guy said it is because of "casas" and the general difficulties in the economy. He immediately started telling me that he knows at least 20 people who are walking away from their homes in Oxnard. Some of these people bought for over 600k and now see the same home selling for less than 400k he said. One example he had the family had put down their life savings of 80k to buy a house and are way down on it now and the rates are going to sink them.

Oviously, this is not new news, but I am shocked at how it has affected moral. There seems to be a lot of worry in the community.