Standard & Poor's Ratings Services raised to 'A' from 'A-' the long-term ratings and underlying ratings (SPURs) on California's $73.1 billion in general obligation (GO) bonds and $1.9 billion in Proposition 1A bonds. We simultaneously raised to 'A-' from 'BBB+' our long-term ratings and SPURs on the state's $9.3 billion in appropriation-backed lease revenue bonds (excluding $2.39 billion of lease revenue bonds, which were issued by the State Public Works Board for Regents of the University of California projects). The outlook is stable. Finally, we affirmed the 'AAA/A-1+' and 'AAA/A-1' ratings on some of the state's GO variable-rate demand bonds. The long-term component of the ratings is based jointly (assuming low correlation) on that of the obligor, California, and the various letter of credit (LOC) providers. The short-term component of the ratings is based solely on the ratings on the LOC providers.

"The upgrades reflect our view of California's improved fiscal condition and cash position, and the state's projections of a structurally balanced budget through at least the next several years," said Standard & Poor's credit analyst Gabriel Petek. "As part of Governor Jerry Brown's recent budget proposal and multiple-year plan, the state would also largely retire its backlog of payment deferrals and internal loans. We view the alignment between revenues and expenditures as much improved and largely a result of policymakers' heightened emphasis on fixing the state's fiscal structure in the past two budgets. This has primarily consisted of programmatic reductions and reforms designed to generate budget savings because, until recently, strongly rebounding tax collections have not accompanied the economic recovery. Now the economic expansion is gaining positive momentum, however. In addition, the voters' approval in November of temporarily higher statewide sales and personal income tax rates positions the state to capitalize on burgeoning economic activity and income gains. We believe these factors have worked in concert to help the state reverse fiscal course," added Mr. Petek.

On a four-point scale in which '1' is the strongest, Standard & Poor's has revised California's overall financial management score to 3.0 from 3.5 and its budgetary performance score to 2.6 from 3.0. Standard & Poor's also changed the state's debt and liability profile score to 3.6 from 3.5. The other scores are unchanged from full analysis of Sept. 14, 2012.

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