California Budget Crisis Diaries: Is Lockyer BS-ing to save the state?

This story was reported for the San Diego News Network on May 6, 2010.

See original copy of story.

As education activists plan another protest, California treasurer Bill Lockyer is rallying for the state’s faltering credit rating.

Lockyer’s inquiry: California treasurer Bill Lockyer is wondering if a few banks are teaming up against the state.

According to Reuters, a letter by Lockyer was sent to several banks including JP Morgan and Bank of America asking if the banks were using credit default swaps to lower the state’s rating.

“California’s treasurer wrote to six of the state’s top underwriters on Wednesday requesting information on whether they or their clients are using credit default swaps to ‘bet against the state’s credit.’

The letters from State Treasurer Bill Lockyer to Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley follow letters he sent them in March expressing concern that spreads on California CDS are mispricing the state’s credit risk and inflating interest costs.

CDS are used to hedge against default risk or to speculate on credit quality.

In his latest letter, Lockyer requested information on the extent to which the underwriters ‘are using CDS to bet against the state’s credit’ and the extent to which they ‘are helping their clients use CDS to bet against the state’s credit,’ a statement from his office said.”

The Reuters report goes on to state that Lockyer has long rallied for California in his attempts.

“Lockyer has long maintained that California debt is a safe investment despite the low credit rating on its general obligation bonds.

California’s general obligation bond rating hovers just a few notches above ‘junk’ status, which Lockyer says unfairly adds to the state’s borrowing costs because the state has never missed debt service payments.”

Good job, Lockyer. Work for California’s credit rating!

Yup, another protest: Students and education activists are not giving up. Though, Gov. Arnold Schwarzenegger has promised not to cut any more funding from the state’s education system, the protests continue.

Locally, a grassroots group called Rally for Schools will host a protest at Balboa Park Saturday. The group is asking for protesters to join them so that they can “send the strongest message to Sacramento…we will not accept the abandonment of our public schools.”

The protest will take place 10 a.m.

Buh-bye, redevelopment funds: Schwarzenegger on Tuesday won the right to raid local redevelopment funds to help close California’s budget deficit, but the court ruling provides only a ray of good news in an otherwise bleak fiscal outlook.

Sacramento County Superior Court Judge Lloyd Connelly ruled that the state can take more than $2 billion from local redevelopment funds and transfer the money to school operations. Local governments objected to diverting the money, which generally is used to promote public works projects and rehabilitate downtown areas.

“We dodged a bullet,” said Schwarzenegger’s spokesman, Aaron McLear. “This would have added $2 billion to our deficit.”

During budget negotiations last year, Schwarzenegger and lawmakers agreed to use the money from redevelopment funds for schools in those districts as a way to make up for declining general fund revenue.