California inches closer to junk bond status as budget talks fail

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California inched closer to junk bond status with downgrades from Moody's and Fitch. Even so, key leaders of California couldn't even resume talks to find a solution to the state's $26.3 billion deficit. State treasurer Bill Lockyer continues to warn of dire consequences to the state's ability to do business if its bonds fall to junk ratings.

"Tens of thousands of jobs would be lost and billions of dollars worth of business for California's businesses may be lost" if the governor and the legislature don't quickly solve the crisis," Lockyer told the San Francisco Chronicle. "We're on the edge of being classified as junk bond. When that happens, it becomes not only expensive, but almost impossible to borrow."
Taxpayers will foot the bill of the fiasco. Their taxes will be used to pay the additional interest costs as the bond ratings drop. Moody's lowered California's credit rating two steps to Baa1 from A2 on July 14. That's just two steps away from junk status. Fitch Ratings also lowered California bonds by two steps from A- to BBB, also just two steps away from junk status. California bonds are rated lower than any other state.

Individuals and businesses started being paid with IOUs on July 1 that some banks have refused to take. The state is expected to pay between $1.5 million and $3 million dollars in interest on those IOUs. The amount that needs to be paid goes up everyday that the governor and the legislature fail to come up with a budget deal.

Right now the key stumbling block is education. Democrats want an agreement that the $11 billion taken away from schools and community colleges will be repaid when the economy recovers starting in 2012. Republicans balk at giving that guarantee.

While I agree that long term funding for education is important, is it really worth holding up a budget this year for a future guarantee? The jobs that could be lost would be much more damaging to the state than future education funding. When the economy recovers and the funds are there, the legislature could always vote for additional educational funding if that's what the citizens of California want.

This is not the first time California faced this type of bond crisis. At the end of 2003 when there was a similar budget crisis the state also faced these types of downgrades. It took almost a year to climb out of that mess and cost the state millions in interest charges.

Obviously their political gamesmanship is worth more to those in charge in California than the actual budget itself. If they were truly worried about the finances of the state, they would not allow this game to drive up California's cost of borrowing.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score."
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