RPT-UPDATE 1-S&P revises California credit outlook to positive

Tue Jan 14, 2014 3:50pm EST

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Jan 14 (Reuters) - Standard & Poor's Ratings Services on Tuesday revised its outlook on California's credit ratings to positive from stable, citing the governor's budget plan.

"The outlook revisions reflect our view that Governor Jerry Brown's fiscal 2015 budget recommendation would build upon the improvements made to the state's finances in recent years," said S&P credit analyst Gabriel Petek in a statement.

S&P foresees raising the state's rating one notch within two years, if California follows the $107 billion budget Brown proposed last week, it said.

In the release on Tuesday, the credit agency affirmed its A rating on California's $75.4 billion of general obligation debt and its A- rating on the state's $10.3 billion of appropriation-backed debt.

S&P said it is also encouraged by the proposal's emphasis on repaying debt and building reserves. While Brown did not suggest specific action for making the teachers' underfunded retirement system whole, he did take the "important first step" of highlighting that the pension "is in need of a long-term funding strategy," S&P added.

Brown, a centrist Democrat, supports a constitutional amendment to enshrine a rainy day fund into law and proposed setting aside $1.6 billion in reserve.

Still, progressives concerned about his suggestion to keep spending on health and human services low could create obstacles to the budget's passage.

The housing bust and 2007-09 recession sank California's revenues, and just three years ago, state leaders were forced to close a $24.5 billion budget gap. After voters approved a tax increase, revenues began to rise, along with California's credit quality. S&P and Fitch Ratings have both upgraded its general obligation ratings over the past year.

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