S&P Places California on CreditWatch Positive

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LOS ANGELES— Standard & Poor's placed A-plus rated California on CreditWatch Positive Thursday.

The CreditWatch placement comes on the heels of the May 14 release of Gov. Jerry Brown's revised budget proposal for fiscal 2016.

"Fueled by upward revenue estimates, the budget plan shows the state's fiscal rebound not just continuing, but accelerating," said Standard & Poor's credit analyst Gabriel Petek. "Under the governor's plan, the state would pay down most of a large funding obligation owed to its schools, continue to retire what remains of its budgetary debts, and make significant deposits to its reserve funds."

Progress on these fronts, pending agreement from the legislature, would be well ahead of what the state's Department of Finance projected as recently as January, S&P analysts said.

The CreditWatch is anticipated to be resolved within three months. A positive CreditWatch often is an early indicator of ratings bump.

Fitch boosted the state's GO rating to A-plus from A in February, assigning a stable outlook.

Standard & Poor's, which affirmed California's A-plus rating and stable outlook in February, revised California's financial management assessment to "good" from "standard" at the time.

Moody's Investors Service, which boosted the state's rating in June 2014, affirmed its Aa3 rating and stable outlook in February.

"Our primary focus," Petek said, "will be on the enacted budget and whether it reflects a fiscal structure similar to that of the governor's revised budget proposal. In our view, the governor's revised proposal avoids a disproportionate reliance on windfall-like revenues from capital gains to fund ongoing commitments, thus allowing the DOF to forecast budgetary balance beyond fiscal 2016."

If the DOF forecast, expected to be released after the budget is enacted, shows the same, Petek said S&P could raise the state's rating, mostly likely by one notch.

"We expect any potential rating action would follow the DOF's release of the state's projected monthly cash flows, which typically become available within a month of final budget enactment."

The "May Revise" also shows the state paying over $800 million more in budgetary debt than planned January.

The state's success in reaching these fiscal milestones while still projecting underlying operating balance, including into future years, has led S&P to reevaluate the near-term trajectory of California's credit quality, he said.

"We have concluded that, to the extent the enacted budget anticipates fiscal results similar to those shown in the revised proposal, the state's credit quality could be consistent with a higher rating," he said.

The action also affects the A rating for California's appropriation-backed debt.

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