Atlantis Has Nothing on California

What a mess.

Moody's in a statement cited California's expected massive shortfall for fiscal 2010 of more than 20 percent of its general fund budget and limited options for plugging it.

The state's current A2 credit rating is Moody's sixth-highest investment grade and makes California the lowest rated of the 50 states. The A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status.

"If the legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July," Moody's said in its statement.

"Lack of action could result in a multi-notch downgrade," Moody's added.

A downgrade could push California's borrowing costs up at time when state officials expect to issue up to $9 billion in revenue anticipation notes as soon as possible after a budget agreement is reached -- a deal whose timing is in doubt. (source: Reuters)

As far as I can keep up with California politics (not very well), if Moody's is making California's A2 rating contingent on the state legislature actually passing a budget, the downgrade is a virtual certainty. From what I understand (again, not much), California's budgetary paralysis can largely be blamed on three institutional issues: 1) the super-majority requirement for budget resolutions, 2) the proposition system which ties the hands of the state in allocating money with an degree of flexibility and 3) ridiculously low property taxes. Incidentally, for both #1 and #3 all us Golden Staters can thank a 1978 state proposition (see #2).

At the moment, it's #1 that's causing all the immediate trouble. The Democratic majority has put forward a bill that would fill in the deficit with tax increases* on the upper income brackets and large businesses, but exactly zero of the state Republicans in the Senate will support the bill. I honestly don't know the specific details of the arguments on either side, so if the Democrats actually do happen to be overlooking some potential spending cuts, I'm unaware of that. But given the terrible state of so many of California's services, I'd have to see some pretty conclusive evidence before I stop rejecting the Republican line out of hand.

So while a potential bond downgrade is really only one of California's many fiscal and financial concerns this summer, it sure won't help.

*On that note, here's an interesting snippet from a Brad DeLong article, though any deficit hawks out there might find it more than a little nauseating:
The federal government's discretionary actions are expanding aggregate demand by about $400 billion over fiscal year 2010, but state governments are right now cutting their spending and raising their taxes in order to offset this federal fiscal expansion more or less completely. On net, the government sector will be on autopilot as far as discretionary policy moves to stimulate the economy are concerned: federal-level expansion is offset and neutralized by state-level fiscal contraction. This is not an appropriate macroeconomic policy stance: this is the largest economic downturn since the Great Depression. (source: GRWBH)