California bond rating now lowest of any state

SACRAMENTO â€”  California’s bond rating was downgraded below that of every other state Tuesday by a major Wall Street rating agency, as lawmakers trying to resolve the state’s financial problems faced growing resistance from powerful interest groups.

Citing the state’s prolonged budget impasse and its nearly empty treasury, Standard & Poor’s lowered its rating on $46 billion in general obligation bonds, which investors usually consider one of the safest investments because they are backed by taxpayers.

By reducing California’s bonds from an “A-plus� to an “A� rating, the agency declared that it now considers even the debt of Louisiana -- whose credit had been ranked equally with California’s -- a more trustworthy investment. Most states are rated “AA� or “AAA.�

“Our rating recognizes our view of the lack of political progress around the budget negotiations that we believe is serving to exacerbate the state’s current and projected cash position,� Standard & Poor’s wrote in its report.

Even as the agency chastised the state, Gov. Arnold Schwarzenegger and legislative leaders intensified their negotiations to close the state’s projected $42-billion budget gap. After a 90-minute afternoon meeting, Senate President Pro Tem Darrell Steinberg (D-Sacramento) emerged from the governor’s office and told reporters that “there are a few remaining issues.�

Senate minority leader Dave Cogdill (R-Modesto) cautioned that “we’re still in discussions� and “it’s too early to tell� when a deal might be reached.

With buzz of a potential agreement growing in recent days, activists were taking aim at rank-and-file legislators, threatening to jeopardize the political careers of any who supported a deal the activists opposed.

On Monday, the California Labor Federation summoned Democratic legislators to the union’s office in Sacramento. There, they reiterated organized labor’s opposition to Republican demands for changes in some workplace rules governing when employees take breaks and when they are paid overtime. About 30 lawmakers attended the meeting, said union officials and legislators.

“It was an important meeting for us to have,� said Assemblyman Alberto Torrico (D-Newark). “There were issues that labor was concerned about.� He called the proposed changes “a nonstarter.�

Art Pulaski, executive secretary-treasurer of the federation, said in an interview that there were “no explicit or implied threats� of retaliation against Democrats during the meeting. But he said some lawmakers were elected only because of heavy support from labor. “I think that’s less likely to happen if they vote� to weaken labor protections, he said.

Chuck Mack, secretary-treasurer of the International Brotherhood of Teamsters, Local 70, had been more blunt Friday in a conference call with reporters, saying unions “have to send a message to legislators that there are consequences to this.�

“If we’ve got to marshal our resources, if we’ve got to engage in recalls, then we are going to have to do that,� Mack said.

The California Teachers Assn., another union that plays a critical role in helping Democrats get elected, launched a statewide TV campaign this week against cuts in education money that the ads maintained “could permanently increase class sizes.�

On the Republican side, Jon Fleischman, a conservative blogger and state party official, proposed Sunday that the party censure any legislator who votes for higher taxes. His will be considered Feb. 20 at a party convention in Sacramento, he said.

“In just one day, I have already heard from almost 200 state central committee members expressing support,� Fleischman wrote Tuesday on his blog, www.flashreport.org.

The “John and Ken Show,� a Los Angeles radio talk show, posted on its website photos of the GOP legislators who have not publicly reaffirmed their opposition to taxes. The photos showed just the legislators’ heads -- on stakes.

The Legislature’s two minority leaders, Cogdill and Assemblyman Mike Villines of Clovis, were among those whose disembodied heads were pictured. Along with the photos was the admonition that conservatives “tell them to stand firm on no new taxes or else!�

Other skirmishes over the budget crisis continued Tuesday across Sacramento.

Two state employee unions filed an appeal to overturn a court ruling that allows Schwarzenegger to furlough 238,000 state workers for two days a month. Union representatives said they did not expect a decision before the first furloughs take effect Friday.

State Controller John Chiang, who joined the unions’ position in the lawsuit, promised last week to implement Sacramento County Superior Court Judge Patrick Marlette’s order. On Tuesday, he asked the judge to decide whether the ruling also applies to the 16,000 employees who work for such statewide elected officials as the controller, the attorney general and the lieutenant governor.

The immediate impact of the credit downgrade is not clear. California cannot arbitrarily default on its debts, because the state Constitution requires that debt principal and interest be paid as promised. But a lower credit rating can lead investors to demand higher interest rates on new bonds the state sells for infrastructure projects, or short-term loans when the state is low on cash.

Currently, financing for $4 billion in public works projects is on hold because the state lacks money and investors won’t provide any more while California’s fiscal issues remain unresolved.

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[email protected]

patrick.mcgreevy @latimes.com

Times staff writers Tom Petruno, Evan Halper and Marc Lifsher contributed to this report.

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(BEGIN TEXT OF INFOBOX)

Key players

The state budget is in the hands of the “Big Five,� as the governor and four legislative leaders are known in the Capitol. Stymied for months over tax increases, spending cuts and other moves to balance the budget, they are under pressure from the various interests that helped elect them:

DEMOCRATS

Assembly Speaker Karen Bass of Los Angeles

Senate President Pro Tem Darrell Steinberg of Sacramento

These liberal Democrats, closely aligned with organized labor, are considering rolling back some workplace rules in exchange for GOP support for tax hikes. But unions are threatening retaliation against those who support such concessions. Both leaders took power recently and may be vulnerable to leadership challenges -- which unions could instigate. Another group -- environmentalists -- is pressuring the leaders not to ease pollution restrictions and other rules that govern construction projects, as the governor and other Republicans demand.

REPUBLICANS

Assembly minority leader Mike Villines of Clovis

Senate minority leader Dave Cogdill of Modesto

Both have joined almost every other GOP lawmaker in signing a pledge never to increase taxes. Intense pressure not to waver comes from conservative blogs, talk radio and anti-tax groups. The state Republican Party is contemplating censure of any GOP lawmaker who votes for the taxes that the dominant Democrats and the governor say are needed. But business supporters are cautioning Republicans not to be so inflexible that they lose influence over which taxes may ultimately be raised.

Gov. Arnold Schwarzenegger

The governor long ago parted with his party’s anti-tax activists. But he stays close to business groups that are pushing him not to aim new taxes their way. Another factor is Schwarzenegger’s legacy: He wants to be remembered as the governor who brought the parties together, not the Republican who conspired with Democrats to raise billions in taxes.

Source: Times reporting