UPDATE 1-California finances improved but rating unchanged-Moody's

Mon Feb 4, 2013 1:22pm EST

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Feb 4 (Reuters) - Governor Jerry Brown's proposed budget reflects a "significant improvement" in California's finances, but the state still faces the challenge of highly volatile revenue, Moody's Investors Service said on Monday.

Moody's is holding California's debt at A1 with a stable outlook, while Standard & Poor's upgraded the state on Thursday to A with a stable outlook, from A-minus with a positive outlook.

"The state's improving economy, combined with recent tax increases and spending controls, has put the state on a path to large surpluses, although one that is typical of the boom-and-bust revenue and economic cycles of California," Moody's senior credit officer Emily Raimes said in a statement.

Brown last month unveiled a spending plan for the fiscal year beginning in July that would swing the state's budget, long plagued by shortfalls, to surpluses in coming years.

The plan relies on strengthening revenue from the economic recovery and tax increases approved by voters in November, along with an agreement by lawmakers to restrain spending.

Brown called on fellow Democrats, who control the legislature, to embrace fiscal discipline and set aside plans to reverse many of the deep spending cuts he pressed them to make over the past two years to balance the state's budget.

The governor also proposed paying down billions of dollars in internal borrowing and payment deferrals that the state employed over the past decade to help balance its books. That would limit California's ability to build reserves.

"For the last few fiscal years, California has balanced its budget with one-time solutions like deferring payments from one fiscal year to the next," said Raimes. "This means future surpluses will be needed for reducing the deferrals and getting back to balance."

Moody's said it sees additional risks to California's positive financial position from federal deficit reduction efforts, an economic downturn and the state's "abandoning the fiscal conservatism it has displayed over the past two years."

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