* Illinois remains as U.S. state with lowest rating
* Bond prices already discounted upgrade
* More improvement possible
By Jim Christie
SAN FRANCISCO, Jan 31 Encouraged by California's
improving finances and expectations of balanced budgets,
Standard & Poor's upgraded its rating on $73.1 billion of the
state's general obligation bonds by one notch on Thursday.
S&P raised its rating to A from A-minus and put a stable
outlook on California. It also upgraded $9.3 billion of the
state's lease revenue bonds, to A-minus from BBB-plus.
The rating agency praised moves by California's leaders over
the last two years to balance the state's books.
"We view the alignment between revenues and expenditures as
much improved and largely a result of policymakers' heightened
emphasis on fixing the state's fiscal structure in the past two
budgets," S&P said in a report.
California's economy is expanding again, and voters in
November approved tax increases. Both are expected to raise
revenue for the state, which is the most populous in the United
States with roughly 38 million residents.
The ratings upgrade comes a few weeks after Governor Jerry
Brown said the state's budget deficit is gone and forecast
surpluses over the next four year.
California State Treasurer Bill Lockyer welcomed the
upgrade. He said lawmakers should rally behind Brown's call for
restraining spending to help mend the state's finances.
Rick Ashburn, chief investment officer of Creekside Partners
in Lafayette, California, which oversees about $80 million in
municipal bond investments, called the upgrade long overdue.
S&P never should have rated California A-minus, Ashburn
said, noting that the state's Constitution protects bondholders
by making debt payment a top priority.
The upgrade leaves Illinois with the lowest rating of any
U.S. state rated by S&P. The credit rating agency cut Illinois
one notch to A-minus last week and said it could fall further,
noting the state needs to tackle its huge unfunded pension
Illinois also has the lowest state rating from Moody's
Investors Service, at A2. Moody's rates California A1.
UPGRADE DISCOUNTED BY BOND PRICES
The $3.7 trillion U.S. municipal bond market, which has
widely anticipated the S&P upgrade, pushed yields on
California's bond lower on Thursday.
California's 10-year general obligation bonds yielded 0.29
percent more than top-rated municipal debt, compared with 0.37
percent on Wednesday and the nearly 2 percent more they offered
Prior to the upgrade, California had the third widest yield
spread after Puerto Rico and Illinois among main muni debt
issuers monitored by Municipal Market Data. On Thursday,
California had the ninth highest spread.
California's general obligation bonds could be on track for
more positive ratings from S&P if state officials use improving
revenue and hold down spending to propel the budget to
surpluses, said Gabriel Petek, S&P senior director.
"Strengthening revenue performance is also quickly
alleviating the state's cash-related stress and is helping
eliminate its need to rely on extraordinary cash management
measures," the report said. "Cash and unused borrowable
resources are now approaching pre-recession levels."
Petek said S&P also is encouraged by Brown's plan to pay the
state's $28 billion of internal borrowing and deferred payments
used to help close budget gaps over the years.
"The backlog of deferrals means that a significant share of
current year spending goes to paying for prior year expenses,"
S&P said. "We expect that the range of possibilities for the
state's credit rating would extend higher once it is free of
"We think that's a really big deal," Petek added.