California's new budget deal may brake the recent decline in the state's rating but the one-time nature of many of the measures taken to close a $24 billion deficit leave the state in bad shape, Moody's Investors Service said on Thursday.
The deal signed by Governor Arnold Schwarzenegger on Tuesday was achieved through a combination of cuts, raids on local funds, accounting maneuvers and one-time revenues that leave the state poorly positioned for budgetary balance in future years, Moody's senior analyst Emily Raimes said in a statement.
The budget for fiscal 2010 may be balanced, but the impact on the state's liquidity situation going forward remains an unknown, said Raimes.
Moody's rates California's general obligation debt at Baa1, or three notches above junk, following a two-notch downgrade on July 14. That's the lowest rating of any U.S. state and came as lawmakers struggled to agree on a budget and officials resorted to issuing IOUs to pay workers and suppliers.
California is likely to now move to short-term cash flow borrowing which would help the immediate crisis.
However, a very large cash flow borrowing, or one that stretches across fiscal years, could place additional stress on the state's cash position at the end of this year or next year, said the analyst.
The budget deal has created the grounds for a significant structural imbalance in coming years, she said. The state will have to repay about $2 billion of the $4 billion borrowed from local governments with interest. It has further pledged to repay the more than $6 billion cut from education funding and $11 billion cut from schools in 2009 and 2010.
These and other solutions agreed to could put California in a position of facing a structural imbalance of more than $15 billion in future years, said Raimes.
California's rating remains on alert for possible downgrade, said the agency.