Bloomberg News

California May Get Rating Upgrade, Greencoast’s Neale Says

November 09, 2011

(For more news from the Bloomberg State and Municipal Finance Conference, see {EXT2 <GO>}.)

Nov. 2 (Bloomberg) -- California weathered its most recent budget process well positioned for an upgrade of its credit rating, the worst in the U.S., said Mary Neale, principal and founder of Greencoast Capital Partners LLC.

Neale said she expects the state’s rating to be raised because of its diverse economy and measures taken by Governor Jerry Brown and other leaders to stabilize finances. California is rated A- by Standard & Poor’s, its seventh-highest grade.

“In a year’s time, I think it will go up,” Neale said today on a panel at the State and Municipal Finance Briefing hosted by BloombergLink in New York. “California has been unjustly penalized.”

Even so, cities, counties and school districts in the most populous state face reductions in state aid, said another panelist, Eric Friedland, head of municipal credit research for Schroder Investment Management North America.

Brown eschewed the “gimmicks” of earlier budgets in favor of real spending cuts that will begin to shore up finances, said Paul Rosenstiel, a principal at De La Rosa & Co. and a former deputy treasurer of California. In doing so, he began to choke off the flow of money from Sacramento to local governments in California, he said.

Math Not Working

“The math just doesn’t work out for you to be able to solve the budget problem without cutting the amount of money that goes to local governments,” Rosenstiel said. “We really need to address the whole question of state-local fiscal relations.”

California set aside $551 million for local governments in its fiscal 2012 budget for public safety and welfare programs. That’s a 21 percent increase from the previous spending plan, according to documents on the Finance Department website. Some of that money is intended to cover the cost of local governments assuming responsibility for jail and probation for thousands of convicts who otherwise would be in state prisons.

Automatic spending cuts also would eliminate $1.5 billion from public education, the equivalent of shortening the school year by seven days, if revenue falls short of projections by more than $2 billion.

School districts and counties are especially vulnerable to severe cuts from the state, while utility districts whose bonds are repaid through user fees are less so, Friedland said.

“Counties are very exposed,” he said. “School districts are highly exposed.”

California’s municipal-bond market is “very diverse,” Friedland said, meaning that the impact of state cuts would vary by region. Mature housing markets such as Los Angeles and San Francisco are less vulnerable than volatile markets such as the Inland Empire east of Los Angeles, he said.

--Editors: Mark Schoifet, Stephen Merelman

To contact the reporter on this story: Kathleen Hays in New York at khays4@bloomberg.net James Nash in Sacramento at Jnash24@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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