Moody’s Investors Service put out a negative warning on California’s credit after the state announced recently its revenue collections for the first quarter of the fiscal year were more than $700 million below projections, 3% short of estimates.

That is "credit negative" for the state, Moody's says. That shortfall also means state residents may face steep mandatory spending cuts according to “triggers” laid out in Democrat Governor Jerry Brown’s budget enacted last January, a budget which slashed state spending by $12.5 billion.
California is the most-indebted state in the country. It also has the nation’s lowest credit rating, and it has cities with some of the highest unemployment rates in the land.

Moreover, California Treasurer Bill Lockyer on Friday said the state will face continued budget challenges over the next ten years, after completing an analysis of the state’s long-term debt obligations. According to the California Debt Affordability Report, even without issuing any new general obligation or lease revenue bonds, California’s budget deficit by 2020 will hover around $6 billion.

California is not alone. New York state already announced a possible $2.4 billion annual shortfall due to layoffs, including those on Wall Street. Florida is also reporting revenue shortfalls. 

The concern now in California is that spending on universities and welfare programs may be cut. Under the governor’s budget, the first in line to face cuts in a $1 billion revenue shortfall scenario are California’s universities, the University of California and California State University systems, and social services. 

Moody’s warns: “The year-to-date underperformance in the state’s revenue makes it likely that at least the first level of spending cuts will be triggered.”

Moody’s says though that helping California’s already battered credit rating is a new bill adopted October 9 which will prohibit the state’s towns and cities from filing for federal bankruptcy unless the town or city can deliver a “neutral” evaluation of its finances through mediation or has declared a fiscal emergency.

“California now joins nine other states that apply some form of restriction to a municipality’s ability to file for bankruptcy,” Moody’s notes, adding, We expect the mediation process to weed out entities that aren’t really committed to bankruptcy but use its threat or that of fiscal emergency to gain negotiating leverage with employee groups.”