Standard and Poor's cites the lack of progress in budget negotiations for the downgrade, making loans to the government super-expensive.
"As a Californian, I'd be a little upset, very upset that they haven't gotten the budget passed, and I'm now being penalized because the state has to pay more in interest," said Joseph Eschleman, Wachovia.
Tax dollars that could go to schools and social programs would, instead, go towards higher interest payments. With negotiations going on 91 days, it's been a huge struggle for leaders to come up with an agreement on how to plug the $42 billion deficit.
Without a budget agreement by the end of the week, state offices, including most unemployment centers, are gearing up to close this Friday, and every other one after, as part of mandatory furloughs. While the call centers will be staffed, the 9.3 percent of Californians looking for work won't have access to job search services.
"If you can't get in here to talk to unemployment, to look for a job, where else are you going to go? Not everyone has a computer or the Internet at their house," said Scott Diller, who is currently unemployed.
The frustration is felt too at the county level. The state has stopped sending local governments the money they use for health and social programs.
So at least two southern California counties are talking about not sending Sacramento the taxes they collect to make up for the funding loss.
"It's a delicious idea, but probably not legal. There's a high level of frustration, not only in L.A. County, but in counties all up and down the state of California. The state has not gotten its act together," said L.A. County Supervisor Zev Yaroslavsky.
But just in case the counties actually do withhold the tax dollars, the Schwarzenegger administration came out with a threat of its own.
"If the counties were to withhold certain payments, hypothetically the state could, in turn, withhold certain disbursements down to the county level," said H.D. Palmer, CA Finance Department.
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