Schwarzenegger budget tied to bonds that may fail |

Schwarzenegger budget tied to bonds that may fail

Associated Press

SACRAMENTO – Gov. Arnold Schwarzenegger’s budget is perilously linked to a variety of bond issues that could fail at the ballot box and in the Legislature, toppling his financial rescue plan and further damaging the state’s battered credit ratings, Wall Street analysts warned Friday.

The governor himself also wasted no time sounding the alarm.

Before unveiling his spending vision for the 2004-05 fiscal year beginning July 1, he urged Californians to help him through this year first, touting his $15 billion California recovery bond to “get rid of billions of dollars in inherited debt.

“If this bond does not pass in March, we will be forced to make painful cuts in essential programs. We cannot let that happen,” the governor said, calling the prospects “disastrous.”

“We’d have to make more than $12.3 billion in reductions, and that wouldn’t be prudent,” added his budget director Donna Arduin.

But scenarios that involve Wall Street’s patience, the March mood of California voters, public opposition from state Treasurer Phil Angelides and the necessity of a two-thirds majority in the Legislature are worrying financial analysts who have already severely downgraded California’s credit ratings in recent weeks and months.

All fear that voters will reject the governor’s bond proposal in March, possibly leaving the state with one option: rolling over $14 billion in short term debt into the new fiscal year. That would represent the third year the state has rolled over its short-term debt, now more than doubled from its original size.

“What time do you lose confidence? Market confidence is always a fragile thing,” said David Hitchcock, a New York-based analyst with Standard and Poors. The rating agency downgraded California’s credit rating last July to two notches above junk bond status.

Ratings analysts are also watching for courts to endorse a fallback $10.7 billion borrowing plan that may be necessary if voters reject the governor’s $15 billion vision to spread this year’s short-term debt across nine to 15 years.

If that also fails, “our level of concern is going to start to go up,” said Hitchcock.

That could mean another round of lowered ratings that have already sent California’s creditworthiness to the nation’s basement. Lower credit ratings could cost taxpayers millions of dollars in higher interest costs on the billions of dollars the state will likely borrow in the coming months.

Angelides added to Wall Street’s jitters Friday, telling reporters that as the state’s top financial officer that he will oppose Schwarzenegger’s deficit bond.

The treasurer called instead for tax hikes on the wealthy and closing billions of dollars in business tax loopholes.