Despite a recent flood of state accounting questions, Standard & Poor's gave its highest rating Wednesday to $10 billion in short-term notes California will issue this month to ensure it has enough cash to pay its bills through next June.
Standard & Poor's ran several stress tests on the state's cash situation and determined that California should have more than enough money in its coffers to pay back $10 billion next spring, issuing an SP-1+ rating to the state's short-term notes. California borrows money in the first half of each fiscal year because the bulk of its revenues come in the spring.
The state plans to begin selling the notes to investors on Aug. 14, with the interest rate determined two days later.
To help pay general fund bills for schools, health care and prisons, the state not only borrows from Wall Street but relies heavily on internal special fund accounts, which come from dedicated user fees or payments from regulated industries. The state is already borrowing $9.6 billion in cash from these special funds and has indicated that it can tap nearly $9 billion more if necessary, according to S&P analyst Gabriel Petek.
Ideally, the state would not have to rely on any special fund borrowing to manage its cash or balance its budget, Petek said. But California has done so since July 2007, one indication of its budget mess since that time. S&P still gives the state a nation-worst A- credit rating for its general obligation bonds. Petek suggested that the state would likely have to rely less on special funds to make general fund cash payments before it receives a better rating.
Nonetheless, S&P bases its short-term borrowing on different metrics: how much cash the state has at its disposal and whether the state will have a problem repaying bonds in May and June. S&P believes that even if voters reject the governor's taxes and the state misses on various optimistic assumptions, California can repay $10 billion in loans.
"We think they've got a pretty strong commitment to doing what they need to do to assemble the cash," Petek said.
Recent questions surrounding the state's books, which came after the state parks department revealed it had hidden nearly $54 million, have not affected California's ratings, Petek said. He said it was not a significant amount against the state's overall $142.4 billion spending plan, and that he would be more worried if new liabilities had been discovered rather than reserves. But he noted that if a larger "material accounting problem" emerges, the ratings agency could have concerns.
The S&P report reveals that the state Department of Finance is not counting on $1.5 billion in liquidating defunct redevelopment agency assets, nor $200 million in new federal funds for In-Home Supportive Services despite relying on them in the budget. Finance spokesman H.D. Palmer said the department remains confident that the state will ultimately get that money, but the redevelopment funds could be subject to litigation in the next year, while it is unclear whether the federal government will approve the IHSS money before June.
S&P also expressed doubt about whether the state will actually reap $500 million in new greenhouse gas emissions fees on companies under California's nascent cap-and-trade program. In one stress test, S&P assumed the state would only see half that money. Petek said the agency had some skepticism because it is a new revenue source.
"We don't really have a history there," he said. "I have a feeling they aren't 100 percent sure what to expect from that."