The higher rating meets markets expectations that had been building over the last few months and brings the state out from the bottom of state ratings, one notch above Illinois.
The outlook, previously positive, is now stable. The upgrade affects $73.1 billion of GO bonds.
S&P also raised the ratings on $1.9 billion of the state’s Proposition 1A bonds to A and upped the rating on California’s $9.3 billion of appropriation-backed lease revenue bonds to A-minus from BBB-plus.
“The upgrades reflect our view of California’s improved fiscal condition and cash position, and the state’s projections of a structurally balanced budget through at least the next several years,” Standard & Poor’s analyst Gabriel Petek said in the report.
Gov. Jerry Brown proposed a $98 billion budget in January to the Legislature that said the state had eliminated its deficit, something unheard of over the last decade. The Democratic governor received help in November when voters passed a temporary tax increase, adding an estimated $6 billion of revenue annually to his spending plan.
The firm had raised its outlook on California to positive from stable in February 2011.
Petek said there is also potential for further “upward rating movement” pending improved economics and revenues, as well as progress in paying down budget liabilities. On the other hand, the report warned the state’s rating could face downward pressure if structural deficit and cash-flow problems return.
The ratings move had been mostly anticipated by the market.
“California bonds had already been trading into very aggressive spreads, at about 40 basis points off triple-As,” said Matt Fabian, a managing director at Municipal Market Advisors. “I don’t think it is reasonable to expect bonds to rally more on this [upgrade.]”
With California’s revenues expected to improve, this could be the first of other upgrades to the state’s rating over the next few years, according to Fabian.
Moody’s Investors Service rates the state’s GOs A1 and Fitch Ratings has them at A-minus, both with stable outlooks.
Last week, Standard & Poor’s cut Illinois’ rating to A-minus; both Moody’s and S&P now give California higher ratings than Illinois. Fitch still has California lower.
The narrowing of California yields against triple-A municipal bonds is a trend that began around two years ago as the state’s budget process began improving after years of turmoil and investors chasing higher yields found opportunity in California bonds.
Investor faith in the state’s credit appeared at a low in 2009 when California faced a cash crunch because of a late budget, which forced Controller John Chiang to issue IOUs instead of selling the usual annual issuance of revenue anticipation notes.
California will likely next be in the market this spring for a sale that typically hovers around $3 billion. In the fall, the state took advantage of tightening interest rates, selling $1.75 billion of GO debt at some all-time low rates.
“It’s been a tough climb out of the hole. But the governor and Legislature have provided strong leadership,” California Treasurer Bill Lockyer said in a statement Thursday. “California has emerged with sounder financial management and structurally sturdier budgets, and placed itself on a more sustainable fiscal path. S&P’s action recognizes this progress.”