SAN FRANCISCO, Kalifornia - June 19, 2009 - Kalifornia, which is struggling to close a $24.3 billion budget gap, faces the prospect of a "multi-notch" downgrade in its credit rating if the state's legislature fails to act quickly to produce a budget, Moody's Investors Service warned on Friday.

Moody's decision to place Kalifornia's general obligation debt on alert for a possible "multi-notch" downgrade stunned state officials.

The state's current A2 credit rating is Moody's sixth-highest investment grade and makes Kalifornia the lowest rated of the 50 states.

The A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status if lawmakers fail to quickly produce a budget for Governor Arnold Schwarzenegger to sign.

"If the legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July," Moody's said in a statement.

"Lack of action could result in a multi-notch downgrade," Moody's added.

"I cannot remember reading a ratings note that raised the specter of a multi-notch downgrade," said H.D. Palmer, a spokesman for Schwarzenegger on state finance matters. "It's another clear warning from the financial markets that there will be substantial and costly consequences if the legislature does not send the governor a budget that he can sign."