SAN FRANCISCO - California's latest budget revisions were enough to get the state off Moody's Investors Service's watch list for downgrade, the rating agency announced Friday, though it affirmed its Baa1 rating on the state's general obligation bonds.
The outlook is now stable.
Moody's is the second agency last week that removed California from a negative watch, following Standard & Poor's, which assigns California an A rating and negative outlook.
Lawmakers adopted more than $23 billion in budget-balancing measures in July, to adjust for declining tax revenue. It was the third time in less than a year they were forced to make massive budget adjustments.
According to Moody's, those July actions solve the current-year budget gap, though largely with one-time solutions that will create further budget gaps in the future.
The actions were also enough to address the state's severe cash crunch, so bad the state resorted to issuing more than $2 billion in IOUs to some creditors.
Last week, California announced a $1.5 billion short-term loan from JPMorgan that will allow it to redeem the IOUs as of Sept. 4, another factor Moody's cited in removing the state from negative watch.
The state's Pooled Money Investment Board met Friday to ratify the Sept. 4 redemption date, almost a month ahead of the formal Oct. 2 maturity date printed on the IOUs.
The JPMorgan loan is to be taken out in September by a $10.5 billion revenue anticipation note sale to be lead managed by JPMorgan.
California remains on negative watch by Fitch Ratings, which assigns a BBB rating to state GOs.
In a related action, Fitch Friday downgraded the California State Teachers Retirement System's credit enhancement program to AA-plus from AAA.
The teacher pension system's investments have declined by $53 billion over the past two fiscal years, to $118.8 billion.
CalSTRS is uniquely handicapped, Fitch added, because its contribution rates are set by statute and require legislative action to change, which Fitch believes to be unlikely given the "current harsh economic conditions and the fiscal problems facing California."
Most other pension programs in the state have the power to raise contribution rates to restore funding levels.
As of June 30, the CalSTRS credit enhancement program supported about $2.6 billion in municipal obligations through letters of credit and standby bond purchase agreements.
"Like other LOC and SBPA providers, CalSTRS has experienced an unprecedented level of draws on its municipal commitments over the last year," Fitch said in a news release.
Fitch affirmed CalSTRS' F1-plus short-term rating, reflecting funds that are "more than sufficient" to meet its near- to intermediate-term obligations.
Moody's placed CalSTRS' Aaa long-term issuer rating on review for possible downgrade in July.
In February, Standard & Poor's lowered its issuer credit rating for CalSTRS to AA from AA-plus, because its criteria limit pension fund ratings to no higher than three notches above their GO ratings.
Moody's action Friday will also affect the ratings of California economic recovery bonds, state lease debt, and any other debt reliant on the state for payment.
California's credit strengths, according to Moody's, include a large, diverse, and wealthy economy; and a relatively well funded pension obligation.
Weaknesses include weak revenue collections that threaten further current-year budget shortfalls; a political environment in which making speedy and productive gap-solving decisions is difficult; reliance on one-time solutions to longer-term problems; limited financial and budgetary flexibility; and a history of reliance on deficit borrowing to resolve budgetary gaps.
