Moody's becomes latest to downgrade California bonds

Moody's Investors Service downgraded California's general-obligation bonds to A2 from A1, the New York-based agency announced Friday.

Moody's became the third ratings house to downgrade California's general-obligation bonds this year, following similar moves by Standard & Poor's and Fitch Ratings. State Treasurer Bill Lockyer is planning to sell $4 billion in general-obligation bonds to replenish the state's Pooled Money Investment Account and help pay for construction projects around the state.

California now has the distinction of being the lowest rated state by all three major ratings services. Only Louisiana, with which California was formerly tied, comes closest.

The downgrades likely will force Lockyer to offer higher yields to investors, costing California taxpayers more in interest payments. Lockyer spokesman Tom Dresslar questioned the ratings agencies' credibility and said that California should be judged on the fact that it has not defaulted on past general-obligation bond payments.

Still, each ratings service has provided an analysis that includes a concise description of California's dysfunctional governance system, noting how the state's flaws are exposed in bad financial times. The analyses temper their criticism by noting that California has unique advantages based on the size of its economy and that the state places a high priority on bond repayment.

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