NEW YORK - Standard & Poor's Ratings Services said two developments occurred in April that could affect the potential upgrade of California's debt from the current level of A-minus.

First, personal income tax (PIT) collections fell well below state budget assumptions for the month. Second, the recent California Superior Court (Sacramento) decision in Steinberg, Perez v. Chiang (hereafter, the Steinberg decision) could allow the state legislature to rely on questionable fiscal assumptions and still comply with constitutional mandates for a timely and balanced budget.

Although, taken together, these developments could weaken the state's prospects for further improvement in its fiscal structure, Standard & Poor's does not consider such an outcome to be inevitable. Standard & Poor's continues to believe state lawmakers could pursue a budget structure that extends the progress made on this front with the fiscal 2012 budget.

And, with the ability to pass a budget out of the legislature with a simple majority, Standard & Poor's also continues to believe the chances for a timely fiscal 2013 budget remain good and partially contribute to our positive outlook on the state's debt.

However, the now-larger deficit, as well as the potential practical implications of the court's decision in the Steinberg case to budget development, will test the legislature's commitment to a stronger fiscal position as a public policy priority.

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