California’s risk of debt-rating downgrade diminishes

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 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.�

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