Immigration’s Adverse Impact on California’s Debt Rating; Explained

Published on July 27th, 2011

Here is a quintessential "good news, bad news" situation.

The good news: Standard & Poor’s, referred to in a  recent Associated Press story as "one of the nation’s leading bond-rating agencies" has upgraded its opinion of California’s finances from "negative" to "stable" after Gov. Jerry Brown recently signed a rare on-time budget for the start of the new fiscal year. [Rating Agency Says California Bond Outlook Stable, by Judy Lin, July 7, 2011]

According to S & P, most of California’s new budget’s provisions are realistic although it indicates that California's longer-term financial prospects depend on a continuing rise in tax revenue, primarily from the wealthy.

The bad news: S & P has no credibility. Along with Moody’s Investors Services and Fitch Ratings, S & P was one of the three credit agencies whose inability to foresee the folly in sub-prime mortgage lending and the packaging of those loans for resale led to the 2008 financial meltdown. According to the agencies, the bundled mortgage loans were "AAA" quality even though they were worthless. Had the agencies done their due diligence, there’s a strong probability that the financial crisis could have been avoided or at least minimized.

Eventually, Securities and Exchange Commission and Justice Department enforcement officials investigated the enabling role of Wall Street rating agencies in the financial meltdown.

When it come to advice from S & P, buyer beware.

Currently, California has the lowest credit rating among the 50 states. S&P affirmed the state's general obligation bonds rating at "A-" which is six levels below the top.

But the rating could easily be higher. In my recently published CAPS Issues piece titled California’s Education Crisis Reflects the States Overpopulation and Over-Immigration Crisis, I wrote that K-12 education for 1.5 million enrolled limited English speakers that includes illegal aliens, the children of illegal aliens and legal immigrants costs California at least $7.5 billion annually. I arrived at that total using the most conservative calculation of a $5,000 average annual per pupil cost. Many analysts put the total at an aggregate $10 billion per annum. Read my entire report here.

If California promised S & P that it could and would trim between $5-10 billion from its annual budget, the state’s rating would rise correspondingly.

Although rating agencies don’t directly include immigration in their determination of California’s financial health, excessive immigration eventually plays a huge in the final credit analysis.

The lower California’s rating, the more taxpayers pay every time the state borrows money. We’re not talking small change either. California's debt payments tripled from $1.8 billion paid during the fiscal year ended June 30, 2004 to a staggering $5.5 billion in the current fiscal year ending June 30, 2011.

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