Concerned that California's worsening financial picture could hurt its counties, Moody's Investors Service is considering lowering the credit ratings of the state's county governments.
The Wall Street rating agency had already announced last week that it was considering a downgrade of California's rating in the aftermath of the Sept. 11 terrorist attacks and the state's cloudy financial picture resulting from the energy crisis.
The counties' bond ratings now range from Aa2 to Baa2. A downgrade would mean that the counties would pay millions more in interest when financing their debts.
This week, Moody's gave the counties a negative credit outlook, which stops short of warning that a downgrade in the rating is imminent, but indicates that it could be later. It did so because of "the possibility that the state could address a significant part of any budget shortfall by diverting revenues from local governments, particularly counties," to balance the state budget, the firm said in a report.
That is what California did during the early 1990s, the last time it faced a similar financial problem.
California faces a $4-billion deficit in the coming budget year. That number could grow dramatically--to as much as $10 billion--if the state is unable to pull off a long-delayed $12.5-billion bond issue to repay the billions it spent buying electricity to avert blackouts. Slumping tax revenues from stock options and capital gains are also expected to increase the deficit.