Citing political turmoil in California over budgetary problems and a gubernatorial recall, Standard & Poor's Rating Services announced it was lowering its rating on the state's $26.8 billion of state general obligation debt by three notches, to triple-B from single-A.

California's debt rating is now mired two levels above junk status. Only one state's debt has ever been rated this low by S&P -- Massachusetts from 1989 to 1992 -- in the 47 years since S&P has been tracking state-issued bonds.

The action, announced after bond trading had ended Thursday, spells further economic troubles for California, where Democratic and Republican legislators have been locked in a stalemate over how to close a $38.2 billion budget deficit. Unable to pay salaries of some state workers and other expenditures until the budget is completed, the credit downgrade adds new financial woes in the Golden State.

One consequence, state officials said, was they would have to immediately pay $33.6 million in penalties triggered by the downgrade to a network of seven banks that recently extended $11.6 billion in loans to the state. Longer term, the California treasurer's office estimates the state will have to pay about $1 billion in additional borrowing costs on $24.1 billion in other bonds that have been authorized but not yet issued.

"This will take us years to dig out from," Steve Westly, California's state controller, said in an emotional telephone conference with reporters. "This is a very sad day for the state of California."

S&P officials said they decided they needed to move by three notches, instead of the usual one or two because of the severity of the state's budget crisis and the distraction of a gubernatorial recall. Earlier this week, California's secretary of state certified that enough signatures had been gathered in a Republican-led recall election against Democratic Gov. Gray Davis for a vote to take place. That election has been set for Oct. 7.

In its note, S&P cited a "lack of progress" in adopting a fiscal budget, which has been "aggravated by the gubernatorial recall election." It said the recall means that "the prospects for meaningful structural budget reform resulting from any enacted budget are diminished."

The news could have been worse. For example, S&P added that it was removing the state's debt from "credit watch," a categorization it makes about debt on which it is considering a ratings downgrade. "Further credit deterioration in the short term is unlikely absent a severe cash-flow crisis," S&P said in its release.

Moreover, Moody's held its rating on California debt at A2 Thursday, an equivalent level to where S&P had been before its downgrade. Moody's still has California debt on a watch list for a possible downgrade. Moody's analyst Ray Murphy said he anticipates the California senate may reach budget consensus in the next few weeks, which could trigger further consideration of the state's debt rating.

The S&P downgrade could actually help resolve the budget dispute. After emerging from a budget caucus in Sacramento late Thursday, Democratic state Senator Richard Alarcon of Los Angeles said the downgrade will put fresh pressure on him and his fellow Democrats to resolve their differences with Republicans. Some top Democratic and Republican lawmakers are trying to hammer out a compromise that may be accepted soon.