- The Washington Times - Monday, February 10, 2003

LOS ANGELES, Feb. 10 (UPI) — A gloomy short-term outlook for California's financial picture led Moody's to lower its ratings on more than $27 billion in outstanding state bonds Monday.

The credit rating agency's move had been expected by state officials. It followed a new report that raised serious questions about the financial strength of California's middle-class and lower-income sectors, its impact on future tax revenues and closing a budget deficit estimated at between $26 billion and $35 billion.

"Absent a stronger than anticipated state and national economic rebound this year, we expect deficits to persist beyond fiscal 2004," Moody's said in its analysis of the situation. "As a result, the state will likely rely on rollover financing in the short-term market to meets its cash flow needs over the next 18 months to two years."

Moody's lowered its rating on $5.5 billion in lease revenue bonds from A2 to A3 and dropped its rating on nearly $22 billion in outstanding general obligation bonds from A1 to A2 with a stable outlook. The A2 rating will be assigned to the state's upcoming $900 million general obligation bond sale.

"These rating actions reflect the magnitude of the imbalance between the state's revenues and expenditures and the expectation the state will not be able to sufficiently address the imbalance in the upcoming fiscal year — given the inherent obstacles to reaching consensus on solutions to the problem," Moody's said.

Moody's said it expected California to find buyers for its bonds in the financial markets. But the agency warned that hefty spending cuts would be needed to improve the fiscal picture.

"The California state constitutional requirement of a two-thirds majority vote of the Legislature to enact a budget will make reaching political consensus difficult. Both the expenditure and revenue proposals are expected to encounter strong opposition from various constituencies," Moody's predicted.

Sorting out California's budget dilemma is becoming an ongoing epic in Sacramento as the Golden State recovers from the hangover of the stock market boom that turned out a steady supply of stock-option millionaires in Silicon Valley and boosted the nest eggs of well-off retirees.

Gov. Gray Davis has blamed the budget gap largely on a slump in revenues caused by the stock market downturn. The state's progressive income tax code places more of the tax burden on the upper-income taxpayers, who are the most likely to own equities.

Some analysts have warned of a scenario under which President George W. Bush's proposed federal tax relief will cut into California's tax revenues — which are based on an individual's 1040 form. That would leave the state's Legislature to find other sectors to close the gap.

One answer would appear to be to raise taxes on upper-income earners or spread some of the pain down to middle- and working-class households, which would put both Democrats and Republicans in political peril.

In addition, a report issued Monday by a non-profit budget analysis organization warned that the boom in the 1990s appeared to have bypassed most middle-class and blue-collar workers.

According to the California Budget Project, the '90s boom left most Californians stuck. The bonanza benefited only a relatively small number of high-tech workers and investors in the long run.

"The wages and incomes of many workers and their families barely surpassed inflation, despite strong job growth and record low unemployment," the organization said in a 117-page report.

"For many families, the recent gains result from the fact that families are working longer and harder simply to make ends meet."

When the numbers tallied in the late 1990s were crunched, the Budget Project determined that California's working class trailed the rest of the nation in terms of wage growth. The report noted that the state's median wage grew at an uneven pace, averaging a modest 1.4 percent between 1989-2001. For the nation as a whole, growth was nearly 5 percent during the same period.

Further, the surge in wages paid to tech workers in the San Francisco area offset more sluggish performances in Los Angeles. About 1.5 million Californians — most of them adults — toiled for a minimum wage that was among the nation's highest but was nonetheless considered by the Budget Project to be inadequate to meet the high cost of living.

The report also noted the relative tax burden at various income levels.

"The poorest fifth of California families will pay 11.6 percent of their incomes in state and local taxes in 2002, whereas the middle fifth of families will pay 9.4 percent, and the top 1 percent of families will pay only 8.3 percent of their incomes in state and local taxes," the report said.

"This disparity is due to the combination of a progressive state income tax and regressive sales, gasoline, and other excise taxes."

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