LOS ANGELES — Standard & Poor's has changed its credit outlook for A-rated California to positive from stable, saying there could be an upgrade in the next two years if the proposed budget gets approved.
"The outlook revisions reflect our view that Governor Jerry Brown's fiscal 2015 budget recommendation would build upon the improvements made to the state's finances in recent years," Standard & Poor's credit analyst Gabriel Petek said in a report released Tuesday. "In particular, the plan's emphasis on debt repayment and appropriating funds to its reserve could be helpful in strengthening the state's fiscal position, in our view."
The agency said that if a budget with such provisions were enacted, the state's finances could be consistent with a higher rating — most likely by one notch — within the two-year outlook horizon.
Standard & Poor's upgraded California to A from A-minus in January.
Further and more significant rating improvement could occur in the longer term if the budget is enacted, as it includes reforms to some of what constrains the state's credit quality structurally, Petek said.
Such reforms include a revamped approach to funding a rainy day reserve designed to counteract the effects of the state's revenue volatility, and highlighting the need for a long-term funding strategy for the state teachers' retirement system.
"Although the governor's proposal stops short of defining a plan for that, citing the need for one in the budget recommendation marks an important first step, in our view," Petek said. "But the risks to the direction of the state's credit quality remain."
The outlook revision impacts $75.4 billion of A-rated general obligation debt, and $10.3 billion of A-minus-rated appropriation-backed debt.
California carries the second lowest rating among the states rated by Standard & Poor's. Illinois is the only one rated lower at A-minus.
Fitch Ratings assigns its A rating to California GOs, and Moody's Investors Service assigns an A1 rating.
