California - "Leader Of All Others On Progressive Policies".......Now Has The Lowest Credit Rating Of Any Other State

California's low credit rating: Investors win, taxpayers lose

When the state of Georgia sold 10-year bonds on Monday, it paid an annualized tax-free interest yield of 2.99% to the investors who bought the IOUs.

If California tried to sell 10-year bonds now, it probably would have to pay about 4%.

That shows the steep penalty that taxpayers of the Golden State incur for its low credit rating, which sank even further on Tuesday: Standard & Poor’s downgraded the state’s $46 billion in general obligation bond debt to an "A" grade from "A-plus," giving California the dubious distinction of being the lowest-rated of all 50 states.

But debt ratings are relative. Being at the bottom with an "A" grade doesn’t mean that S&P believes California is in danger of reneging on its debts. In fact, the state Constitution mandates that the state must repay its bondholders.

What the rating amounts to is a rebuke to California for its failure to get its fiscal act together, as Gov. Arnold Schwarzenegger and the Legislature continue to battle over how to close gaping 2009 and 2010 budget holes totaling $42 billion.

But if there’s really no default risk, why should California be rated much differently than, say, Georgia, which has a grade of "AAA" from S&P? That’s an argument that state Treasurer Bill Lockyer has raised over the last year, seeking to force the rating firms to change their methodologies.

Given the magnitude of California’s financial problems, however, it’s hard to imagine that investors wouldn’t demand some kind of interest-rate premium on the state’s debt, regardless of the official ratings. We may not be a deadbeat, but we sure give off that vibe.

Yet even though California must pay more to borrow than many other states, this might actually be a good time for Lockyer to sell some of the huge backlog of general obligation bonds that voters have approved for infrastructure projects.

Why? Because many investors, fed up with the devastated stock market, are hungry now for income-generating securities that offer relative safety of principal.

"There’s extraordinary demand from individual investors for muni bonds," said Matt Fabian, a managing director at Municipal Market Advisors in Westport, Conn. . .