Moody’s Lowers State’s Rating

California’s credit rating took another hit Monday, but it was less of a blow than the recent downgrade by Standard & Poor’s.

New York-based Moody’s Investors Service, a major rival to S&P;, said it lowered its rating of California’s debt by one level, to A3 from A2.

The new rating is two notches above the BBB grade that S&P; gave the state on July 24.

S&P; cut its rating before the Legislature passed this year’s budget. Moody’s chose to wait until the budget was finished and signed by Gov. Gray Davis.

Moody’s, in a report, said the downgrade reflected “the continued large size of the state’s structural budget gap ... and Moody’s view that the state will have substantial difficulty closing this gap in the next budget cycle.”

The firm said it “anticipates that the state’s recent pattern of late budgets, reliance on sizable short-term borrowings and use of spending deferrals and other non-recurring resources, including deficit bonds, will continue through at least fiscal 2005.”

Because of the risks, Moody’s said the state’s debt would remain on its “watch list” for further possible downgrade.

The budget deal calls for the state to borrow $14.1 billion through bonds to close part of a $38-billion deficit. Even with that borrowing, the budget assumes there will be an $8-billion deficit by spring.

Moody’s said that gap “will present a formidable budget challenge next year.”

The Moody’s downgrade affects $29 billion in general obligation bonds and $5 billion in lease-backed debt.

Investors have demanded sharply higher yields on the state’s bonds in recent months as the budget picture worsened and ratings downgrades loomed.

Moody’s said its A3 rating “recognizes that the state has never failed to meet its debt obligations, and ... reflects the agency’s opinion of the very low probability of a state payment default.”

Moody’s willingness to keep the state above the B level, at least for now, was a small victory for state officials.

“We’re cautiously optimistic about being able to hold on to A ratings,” state Finance Director Steve Peace said.

But he added, “We have to continue to work from now to the next budget year to earn this confidence level from the bond market. It’s certainly not over by any stretch of the imagination.”