SAN FRANCISCO – Standard & Poor’s has revised the outlook on its A-minus rating for California to positive from stable.
“We are revising the outlook because, barring any other credit deterioration, we think the state is poised for credit improvement -- and potentially a higher rating -- pending its ability to better align its cash performance and budget assumptions,,” Standard & Poor's analyst Gabriel Petek said in a statement Tuesday.
In the report, the agency affirmed its A-minus long-term and underlying ratings on the state’s $73 billion of outstanding general obligation debt, and affirmed its other California state credit ratings.
Petek said the state has corrected much of its budget imbalance by reducing spending.
He said improvement in the state’s finances rest largely on whether California can realize its proposed budget cuts and hit tax-collection targets assumed in the Gov. Jerry Brown’s proposed budget.
A recent constitutional amendment allowing the budget to pass on a majority legislative vote, instead of two-thirds, is also a plus because it reduces the risk of tardiness, which can add to cash flow problems, Petek said.
In July, S&P changed its outlook on the state’s ratings to stable from negative.
The new outlook comes after state officials began working to avoid another potential cash shortage.
Controller John Chiang warned lawmakers earlier in February that the state would run out of cash starting at the end of the month unless it adopted $3.3 billion of short-term measures to tackle the problem, such as payment deferrals and internal borrowing.
Those measures also include a supplemental revenue anticipation note deal of as much as $1 billion tentatively set for Feb. 22 as a private placement to financial firms.
Moody’s Investors Service has warned that cash shortage is a credit negative for the state.
Moody’s currently rates California A1 with a stable outlook; Fitch Ratings assigns its A-minus rating and stable outlook.
Chiang also said last week that state revenues last month came in $528 million below forecasts in Brown’s proposed budget. The Department of Finance will release its revenue update for January next week.
“In my opinion, S&P’s rating action is either vastly forward-looking, or oblivious to real-time cash-flow problems for the state of California that do not warrant consideration of an upgrade until their budget is truly stabilized,” said Dick Larkin, head of credit analysis for Herbert J. Sims & Co.
In January, Brown unveiled a $92.6 billion spending plan for fiscal 2013 that attempts to tackle a deficit of $9.2 billion with cuts and tax hikes.
The budget leans heavily on passing a tax initiative that will raise nearly $7 billion by temporarily raising sales taxes and income taxes on the wealthy.
If voters reject the tax plan, additional cuts, mostly to education, would be triggered.
The state will go to market with its first general obligation bond issue this year on March 1 with around $2 billion of refunding GOs.
The treasurer has also set a sale of Department of Water Resources revenue bonds for Feb. 28, a public works lease revenue bond sale for mid-March and another GO deal for mid-April.
