By Yali N’Diaye

WASHINGTON (MN) – California’s ongoing budget woes makes it more
likely that the state will issue registered warrants, but that should
not negatively impact the local government’s credit quality, Moody’s
said Friday.

“The possibility of a temporary interruption in cash flow to local
government issuers from the state is not likely to create cash flow
problems for them despite the fact that warrants could weaken cash flow
at a time when most are already struggling with weak or declining
revenue,” Moody’s said in a report titled “California’s IOUs Unlikely to
Harm Local Government Credit.”

California cities and utilities do not significantly rely on state
revenues, unlike school districts and counties.

Still, IOUs — a commitment to pay a fiscal obligation — should
not affect the credit quality of those issuers, the report says, citing
three main reasons.

First, the relative county and school districts funding likely to
be exposed to warrants “is not large in the context of their total
budgets.”

Second, those issuers, counties in particular, “have access to very
large county treasury investment pools that have short-term lending
capacity well in excess of the likely cash flow loss attributable to
warrants.”

And third, counties have already positioned themselves for the
possibility of receiving warrants and the potential associated liquidity
impacts.

In light of last year’s warrant issuance, counties investment pools
are building up their short-term liquidity, Moody’s said, adding that
“many localities have also increased the size of their fiscal 2011
short-term cash flow notes to account for greater projected mid-year
deficits, both implicitly and explicitly allowing for slowed receipt of
state funding.”

Many have also adopted steps to preserve their liquid resources.

“While the exact timing, size, and structure of the potential
registered warrants issuance is not yet known, if they are of similar
size and scope to the 2010 registered warrants, we expect that issuers
will be able to manage their cash flow to meet all of their financial
obligations,” Moody’s report reads.

The issuers the most likely to be impacted are the small
municipalities with unusually low levels of liquidity.

It noted that the 2010 IOUs did not result in significant rating
action or issuers’ liquidity losses.

Moody’s rates 107 of the 488 Californian cities, 30 of the 58
counties and 295 of the 1,050 school districts.

** Market News International Washington Bureau: 202-371-2121 **

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