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State bond rating lowered

Posted at 10:53 p.m. PDT Tuesday, April 24, 2001

BY JENNIFER BJORHUS

Mercury News

One of Wall Street's top credit-rating houses has downgraded California's bonds because of the state's handling of the energy crisis, a move that could ultimately cost taxpayers tens of millions of dollars.

Saying that mounting and uncertain power costs are likely to do lasting harm to California's economy, New York-based Standard & Poor's on Tuesday lowered the state's credit rating on its ``general obligation'' bonds two notches, from AA to A+ with a negative outlook. That puts California near the bottom of the state bond heap with only one state -- Louisiana -- rated lower.

Standard & Poor's said the rating could go lower if the state cannot resolve the power crisis. The downgrade will cost California millions of dollars in coming years because a lower rating makes it more expensive for the state to issue general obligation bonds to finance projects such as school construction.

The interest on those bonds, which will rise from an estimated 5 to perhaps 5.25 percent, is paid from the state's tax-financed general fund. Although the rating change doesn't apply technically to the different type of bond the state plans to issue by June for power purchases, it will probably make those bonds more expensive for the state, too, bond experts say.

Heightened urgency

``There's a sense of urgency that this problem has been escalating, particularly since the PG&E bankruptcy,'' said David Hitchcock, California analyst for Standard & Poor's. ``This problem could move quickly.''

At least one bond expert said the downgrade was surprising.``To me it's clear that S&P doesn't have much faith in this power-bailout plan of the Legislature and the governor. To me that's the reason they did it,'' said Zane Mann, publisher of the monthly California Bond Advisor newsletter.

No single new piece of information triggered the downgrade, Hitchcock said. The major factor, he said, was simply spiraling costs and no long-term plan for paying the bills. Last week Gov. Gray Davis said the state had been spending $73 million a day to buy electricity, up from $45.8 million a day in late March. Hitchcock said some energy traders suspect the actual costs are higher.

All three major Wall Street credit-rating agencies have California on so-called ``credit watch,'' but only Standard & Poor's has downgraded. One municipal bond expert said Standard & Poor's had been ``trigger happy'' and eager to downgrade. Raymond Murphy, Moody's California analyst, said he had no immediate plans to change California's bond rating, but that he's anxious to see officials produce a long-term plan for financing power purchases.

Murphy said he had a conference call with state officials about the issue Tuesday morning. ``We want the state to develop the plan that gets the general fund out of power purchasing,'' Murphy said. The state says it's working on that, but there's a roadblock.

Revenue bonds

A major piece of the state's plan is to have the Department of Water Resources issue $10 billion to $14 billion in revenue bonds to pay back the general fund for what has been taken to buy power in recent months. But that portion of the plan is tied up in a dispute between PG&E and the California Public Utilities Commission over how to spend the extra money generated by electricity rate increases.

The dispute has also held up the $4.13 billion in financing the state had arranged to pay down the advances it took out of the general fund to buy power. To break the logjam, officials from the state treasurer's office have asked lawmakers to pass emergency legislation to allow the state to issue the revenue bonds.

``California's credit rating and financial strength will be in jeopardy until the state's general fund is repaid for energy costs,'' state Treasurer Philip Angelides said in a statement Tuesday.

State Finance Director Tim Gage and Gov. Davis both downplayed the significance of the rate change. Through a press officer, Davis said the state's economy remains fundamentally strong. The state was downgraded to a lower A rating in 1994 and went on to see tremendous economic growth.

Mounting pressure

Still, a downgrade is bad news that sends a psychological signal in both the finance and real worlds. Some industry watchers said they hope the downgrade pushes lawmakers and state officials, whom they perceive to be too slow in responding to the crisis.

``It sounds like the bond market might be out ahead of some of the policy-makers in California,'' said Severin Borenstein, director of the University of California Energy Institute. ``We're facing a real emergency here.''

John Hallacy, managing director of municipal research at Merrill Lynch, said a lower credit rating puts more pressure on the state to issue the revenue bonds fast, and to conserve cash.``We're kind of at the critical juncture now where the pieces are still all over the floor,'' Hallacy said of the state's efforts to build and approve a long-term solution to the power crisis.

To Nettie Hoge, executive director of the Utility Reform Network and a leading critic of the state's efforts to bail out PG&E and Southern California Edison, the downgrade means ``the analysts are watching.'' She said she hopes that President Bush and the Federal Energy Regulatory Commission are watching, too.

``Hopefully, this is a wake-up call for FERC. Those guys could solve this in a nanosecond,'' Hoge said. ``This is just another milepost on the downward spiral to economic catastrophe.''

Contact Jennifer Bjorhus at jbjorhus@sjmercury.com or (408) 920-5660.

-- Swissrose (cellier3@mindspring.com), April 26, 2001