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S&P lifts threat to cut California's debt rating, for now

August 18, 2009 |  3:43 pm

California’s budget-balancing plan is solid enough to keep the state’s low credit rating from another downgrade, at least in the short-term, Standard & Poor’s said today.

S&P affirmed its A rating on the state’s $67 billion in outstanding general obligation bonds and removed the debt from its "negative credit watch" list. That means the risk of a downgrade "is now less imminent," S&P analyst Gabriel Petek said.

S&P is the first of the three major ratings firms (the others are Moody’s Investors Service and Fitch Ratings) to weigh in on the budget deal cobbled together by the Legislature and Gov. Arnold Schwarzenegger last month.

Fi-bond-ratings-4 With California’s debt ratings already the lowest of the 50 states, and just a few notches above speculative ("junk") status, Wall Street has been watching to see whether S&P, Moody’s and Fitch view the budget agreement as more than just smoke and mirrors.

S&P was more tolerant than Moody’s and Fitch of the state’s budget follies earlier this summer. The firm maintained its A rating through the budget battle in Sacramento, while Moody’s and Fitch in early July both reduced their ratings, to Baa1 and BBB, respectively.

Most states are rated either AA or AAA.

In its report today, S&P said the revamped budget "significantly reduces state expenses and provides a path to improved financial liquidity."

Even so, the firm said it still had a negative outlook on the state’s rating looking out six to 24 months, in part because of the risk that the economy could worsen, further slashing tax revenue.

"We believe the limited indications of economic stabilization are precarious, and if economic or revenue trends substantially falter the state’s rating could incur downward revisions during the intermediate term," S&P said.

To fund cash outlays ahead of expected tax receipts later this fiscal year, the state is planning to raise up to $10.5 billion next month via the sale of revenue anticipation notes, or RANs, that will mature next spring.

The interest rate the state will pay on the RANs could depend in part on the ratings that S&P, Moody’s and Fitch give the notes. Those ratings are separate from the firms’ long-term bond ratings.

-- Tom Petruno

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