California’s debt rating outlook raised by S&P

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Standard & Poor’s has removed the immediate risk of a downgrade of California’s debt rating, saying the state’s plan to balance its budget was ‘largely realistic.’

S&P on Thursday raised its outlook for California’s rating to “stable” from “negative.” The rating, A-minus, still is the lowest of any of the 50 states.

“The negative outlook had been linked to the possibility of a recurring cash deficiency that we now believe the enactment of the fiscal 2012 budget is likely to mitigate for the most part,” S&P said in a report. “Because the state has improved the structural alignment between its recurring revenues and expenditures, we now view the state’s rating outlook as stable through the two-year outlook horizon.”

Importantly, the $129.5-billion budget deal reached by Gov. Jerry Brown and the Legislature will allow the state to issue so-called revenue anticipation notes later this summer, S&P said. California normally borrows billions of dollars via short-term notes in late summer or autumn to tide it over until tax revenue arrives the following spring.

Treasurer Bill Lockyer has said he plans to sell about $5 billion in notes sometime in August.

“Most of the solutions employed to achieve budget balance are largely realistic and should clear a path for the state to issue its revenue anticipation notes, thereby helping maintain adequate operating liquidity for the 2012 fiscal year,’ S&P said.

Still, S&P’s lead analyst for California, Gabriel Petek, said the budget was “a bit of a missed opportunity” because it doesn’t address the “backlog of budget obligations accumulated during the past decade of nonstructural responses to prior budget solutions.”

He also noted that “whether the budget will remain in balance through the end of fiscal 2012 rests on the continued favorable performance of state tax revenues and on the deficit-reducing efficacy of some of the adopted solutions.’

-- Tom Petruno