California's bond ratings don't reflect reality

Lehman Bros. was rated A until one month before it collapsed.

"Lehman's gone, we're still here," Lockyer says, questioning the once-similar ratings.

"The agencies were rating thousands of those goofy derivatives that have cost us trillions of dollars triple-A, while we were A-plus."

This is why it matters: Each little tick up or down the grading scale costs money, either for investors or bond sellers. Sellers means taxpayers when it involves state bonds.

California's latest downgrading -- from A-plus to plain A -- means higher interest rates of 0.15%, according to the treasurer's office. That doesn't sound like much, but it translates into roughly $213 million for this week's bond sale, officials preliminarily project. That would pay a few teachers.

For California's $61-billion backlog of unsold, voter-approved bonds, that could amount to about $2 billion in added interest.

Most states are rated either AA or AAA. California shared the lowest rating with Louisiana until we got shoved lower.

The credit raters' rationale is California's virtually dysfunctional budget system.

In downgrading the state in early February, S&P wrote that "divisive deliberations" between the Legislature and Gov. Arnold Schwarzenegger, plus the two-thirds majority vote requirement, were "frustrating meaningful progress on solving the projected budget shortfall."

But when a $42-billion budget-balancing deal was enacted soon afterward, S&P didn't restore the previous rating.

Moody's and Fitch last week also lowered California's rating, citing the state's still-perilous fiscal situation. Fitch noted that the state's deficit-reduction plan hinges on uncertain voter-approval of some ballot measures in May.

But so what? The rating agencies have always ignored a basic fact: Not only has California never defaulted on a bond, state law won't allow it. Bond-holders are second in line for all state revenue after schools. They rank ahead of the state payroll, prisons, poor folks . . .

"California's not going to go out of business. They're not going into default. They're going to pay you back," says John Cummings, executive vice president of Pacific Investment Management Co. in Newport Beach. "But they really do need to be on time with the budget. And they've got to change that two-thirds majority vote to get it down to 55% or 50%."

Lockyer complains that rating agencies force municipal bond sellers -- state and local -- to meet higher standards than corporations because of outdated rules. "Taxpayers should be treated the same as corporations."

Better, I'd say, given the recent epidemic of bankruptcies and taxpayer-funded bailouts.

Wall Street bond-raters, Lockyer asserts, are catering to investor-pals "who like phony risks."

Municipal Market Advisors, a consulting firm, reported last year -- even before the economy tanked -- that muni bonds rated A defaulted 10 times less than corporate bonds rated AAA.

California bond buyers apparently have gotten the word, no thanks to any rating agency.

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george.skelton @latimes.com