SAN FRANCISCO - Standard & Poor's upgraded California GO bonds to A-plus from A Wednesday, citing voter approval of a rainy-day-fund ballot measure.
General fund annual appropriation-secured debt was also upgraded, to A from A-minus.
The outlook on both ratings is stable.
"The upgrades follow voter approval on Nov. 4, 2014, of a strengthened budget stabilization account under Proposition 2," said Standard & Poor's credit analyst David Hitchcock. "In our view, the new state constitutional provision will partially mitigate California's volatile revenue structure by setting aside windfall revenue for use during periods when state tax revenue could fall materially short of forecast."
The rainy day fund measure passed with a 68.7% of the vote. The measure will increase the size of California's rainy day fund and require the state to deposit above-average revenues into the account. It will also create a separate reserve for public schools.
The provisions have become part of the state constitution and, as a result, cannot be overridden during the annual budgetary process. Until the current budget year, the state had a history of leaving its budget stabilization account unfunded.
"This is the fourth upgrade for California by a rating agency in the past two years and it rewards the state for the immense strides it has taken toward fiscal discipline and budget stability since the Great Recession," State Treasurer Bill Lockyer said in a statement. "The governor, the legislature and the voters of California deserve great credit for their actions."
Standard & Poor's said other factors supporting the A-plus rating include the state's diverse economy of 38.3 million people, recent commitment to aligning recurring revenues and expenses while paying down budgetary debts, and timely enactment of budgets.
Offsetting these strengths are the state's volatile revenue base, which is linked to financial market performance because of the highly progressive income tax structure, and large retirement benefit and budgetary liabilities.
Another weakness is the potential for the state's current structural budget balance to erode when voter-approved tax hikes fully expire in 2018, or sooner if the legislature were to significantly increase ongoing spending.
"The stable outlook reflects our view that California will build a material [budget stabilization account] fund balance in the coming years under recently passed Proposition 2, and that it will continue to pay down deferred liabilities and debt in advance of the 2018 expiration of a temporary income tax surcharge," Hitchcock said in the report.
He added that the outlook also reflects the state's financial position at the end of fiscal 2014, which was the strongest position of the past decade.
California is now the third lowest-ranked state by Standard & Poor's. New Jersey is rated A, and Illinois is rated A-minus.
"As I turn over the reins to Treasurer-Elect John Chiang, this well-deserved credit upgrade is an especially satisfying grace note, and I'm proud of the work we've done together as Californians during my time as State Treasurer," Lockyer said.
