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Standard & Poor's Warns Of 'Crossroad' Facing California Rating

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CALIFORNIA CREDIT RATING THREATENED

SAN FRANCISCO - California's credit rating is at a "crossroad," Standard & Poor's Ratings Services said on Tuesday, noting concerns about the state's cash and budget politics as the new fiscal year approaches.

The rating agency is particularly concerned about how the state's testy budget politics could impede its ability to issue short-term debt.

S&P said in a report that it sees California's 'A-/Negative' rating at a "crossroad ... In our view, the budget process is significant in California's credit profile because if a budget is not adopted in time for the state to issue its revenue anticipation notes (RANs) before its cash runs low, the state's basic operating liquidity can become inadequate."

S&P added that "beyond near-term financial liquidity, we believe budget politics in California already impede the state's long-term credit quality as well."

The course of California's budget politics are uncertain as the fiscal year beginning on July looms.

Democrats who control California's legislature last Wednesday approved a budget to close a deficit of about $10 billion on their own. The next day Governor Jerry Brown, a Democrat, vetoed it, criticizing its "legally questionable maneuvers, costly borrowing and unrealistic savings."

S&P said in its report that it favors Brown's budget proposal, although it has concerns about his plan for a statewide vote on extending temporary tax increases, which he first wants lawmakers to approve.

S&P said that "enactment of a budget with structural attributes similar to those in the governor's revised budget proposal could lead us to revise the state's rating outlook to stable from negative. Moreover, it could potentially lead us to raise the rating depending upon how much we viewed such a budget as improving the state's fiscal structure."

The rating agency said it would consider revising its outlook for California to stable from negative if state leaders agree to one-time solutions "to the extent it allows the state to proceed with its regularly planned cash flow borrowing."

"We would be more likely to revise the state's rating outlook to stable if the state enacted the budget expeditiously and avoided entering a deficient cash situation," S&P said. "By relying heavily on one-time measures, this budget path would be unlikely to benefit the state's long-term credit quality, in our view."

If there is a protracted budget battle, which has been routine in recent years, California may need to take "extraordinary cash management measures," S&P noted.

California temporarily issued IOUs when it was running low on cash during a budget stalemate in 2009. The move allowed the state to maintain cash for its priorities payments, including payments to it bondholders.

A lengthy budget impasse extending into the new year may result in a "patchwork" budget similar to one Brown vetoed, which "may lead us to lower the state's long-term rating depending upon the severity and duration of the cash crisis that we believe could precede it."

(Editing by James Dalgleish)

Copyright 2011 Thomson Reuters. Click for Restrictions.

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