SAN FRANCISCO - After a steady fiscal recovery, the State of California has earned a rating in the double-A category for the first time in more than a decade.
Moody's Investors Service on Wednesday upgraded the state's general obligation bond rating to Aa3 from A1, citing the state's "rapidly improving" financial position.
Analysts also cited the state's adjusted net pension liability ratios that are close to the median across the United States, strong liquidity, robust employment growth, and declining debt levels.
Debt surged in 2010 and 2011, was flat in 2012, and fell in 2013, Moody's said. As of June 1, California had about $25.9 billion in authorized and unissued long-term GO debt.
"The Aa3 rating also reflects the state's volatile tax revenue structure and governance restrictions, in addition to certain recent governance changes and proposals that are meant to address those longstanding issues," analysts said in the credit report.
The state's ratings have hovered in the single-A category, with a short drop to the triple-B category after the financial crisis, for the past decade.
The last time it had a double-A rating was in 2001, when the state carried a Aa3 rating from Moody's.
"California in the last three years has made great strides in managing its financial affairs," State Treasurer Bill Lockyer said in a statement after the upgrade. "Moody's action recognizes that progress and the strong, sustained fiscal discipline shown by the Governor and Legislature. The people of California deserve credit, too, because they voted to increase their tax burden to help the state out and end the days when adoption of the budget by the constitutional deadline could be prevented by just a handful of lawmakers."
In 2010 California voters passed Proposition 25, dropping the threshold needed for budget approval in the Legislature to a majority from two-thirds.
In 2012, voters approved Proposition 30, which increased personal income tax over seven years on residents with an annual income over $250,000, and increased sales tax by 0.25% over four years.
These events have contributed to the state's fiscal progress, according to the treasurer's office. Other contributing factors include deep, ongoing cuts to spending, a stronger cash-flow condition, progress in paying down $35 billion of budgetary borrowing, and a more conservative approach to issuance of new debt, Lockyer's office said.
The Moody's upgrade affects more than $86 billion of California's outstanding debt. Most of the state's lease appropriation debt has been upgraded to A1 from A2, some of its lease revenue bonds were upgraded to A2 from A3, and its revenue bonds were upgraded to A3 from Baa1.
The agency assigns a stable outlook to the ratings, based on an expectation that California's economy and finances will continue to show growth in the near term as the national economy also improves.
The rating could be upgraded again if there is a change in governance that significantly reduces budgetary inflexibility or requires the state to build reserves large enough to cushion against revenue downturns, Moody's said.
It could be downgraded if prolonged economic weakness or stagnation causes deterioration in finances and liquidity, or if there is a dramatic increase in debt or long-term pension liabilities.
Moody's said the Aa3 rating is still relatively low for a state. Only Puerto Rico at Ba2, Illinois at A3, and New Jersey at A1, carry ratings from Mooody's that are lower than California's rating.
Connecticut and Arizona also carry Aa3 ratings.
"California's revenue structure remains volatile, and we expect future economic cycles will continue to impact California's finances more than other states," analysts said.
