California Placed on Negative Credit Watch

The credit rating agency Standard & Poors placed the state of California on a negative credit watch yesterday due to Sacramento's inability to deal with its $24 billion deficit. California already has the lowest credit rating of any of the 50 states.

The Sacramento Bee's Capitol Alert had this information:

The credit watch notification on general obligation and lease-revenue bonds reflects "our assessment of the state's projected depletion of cash by the end of July 2009 absent the adoption of a significant revision to the fiscal 2010 budget," S&P said in a statement.

"Although we continue to believe the state retains a fundamental capacity to meet its debt service, insufficient or untimely adoption of budget reforms serve to increase the risk of missed payments in our view," the notice continued.

If the state cannot balance the budget soon, California will run out of cash some time in July. Investors holding California general obligation bonds and lease-revenue bonds would not only lose out on income but would see the value of their bonds crater if the state starts missing payments to bondholders.

S&P seems to be telling the state that business as usual will not do, something everyone other than our state legislators and the special interests backing them realize.