PHOENIX, Arizona - August 19, 2009 - A credit watch placed on Arizona because of its budget mess is going to cost taxpayers more money.

Standard and Poor's Rating Service on Wednesday revised its outlook of the state's credit from stable to negative. Company analysts said that was based on a variety of factors, ranging from lower than anticipated tax collections to the failure of the Legislature and Governor Jan Brewer to enact a budget for the fiscal year that began July 1.

State Treasurer Dean Martin noted that the announcement technically does not lower the state's AA credit rating from the agency. But he said it does make a difference.

"Because of the conditions, they're thought process either is they're going to be downgrading or there's a strong likelihood that a downgrade is going to be required based on fiscal conditions, economic conditions, budget conditions," he said. "This is a warning to the creditor community there are problems in the future based on this borrower."

Martin said lenders, aware of the possible downgrade, take notice. He said they take into account when deciding how much to charge in interest: The lower they think the rating will go, the more they will demand.

"If you've got an A rating and it's stable, you're going to get a better rate than an A rating that's on negative watch because people are going to start thinking, 'Are they going to get downrated to a B or a C,'" he explained.

The announcement comes as Martin is attempting to secure a line of credit with banks for Arizona to use to manage its cash flow once the state runs out of money to lend itself to keep government operating. But Martin said banks wouldn’t even consider providing operating cash to the state until it adopts a budget.

Martin said that at the rate Arizona is going, its $500 million internal line of credit - essentially money in other dedicated funds - will be tapped out in the middle of October. But he said it takes up to eight weeks to set up a credit line from banks, making it imperative for lawmakers and the governor to act as soon as possible.

He said that even with a balanced budget, Arizona will need that line of credit because there still will be times when the amount the state needs to pay in bills exceeds the amount already collected to that point in revenues.

Martin said these kinds of credit watches are more common in the business world, when a company like Standard and Poor's would issue such a warning when a firm faces some potential liability, like a major lawsuit that could wipe out its major product, that would affect the ability to repay lenders.