SAN FRANCISCO – Moody’s Investors Service said it has upgraded its rating on $5.2 billion of California economic recovery bonds to Aa2 from Aa3.

“The upgrade is based on two years of strong growth in pledged revenues and an expectation of strong growth in the current year and the next few years, combined with a very strong legal structure,” Moody’s said in a report Friday.

Because the ERB sales tax revenues are legally separate from the state’s general fund, the bonds have a higher rating than California’s A1 GO rating, Moody’s said.

Moody’s said the outlook on the bonds is stable partly due to the broad and diverse tax base backing the debt.

The bonds are backed by a dedicated quarter-cent sales tax and the state’s general obligation pledge. The ERBs were first issued in 2004 to help pay for deficits incurred over a cycle of budget crises.

The ratings firm said the “closed-loop feature” of the bonds will continue to increase the coverage of the debt as excess revenues are used to redeem bonds early, leading to the likely full redemption of the bonds by 2017.

However, the firm said the volatility of sales tax revenues in California and the ability of the state to exempt some items from the special tax are potential challenges.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.