UPDATE 3-S&P boosts California bond outlook to positive

(Adds comments from analyst)

SAN FRANCISCO, June 11 (Reuters) - Standard and Poor's Ratings Services raised on Monday its rating outlook on California's general obligation debt to positive from stable, citing the state's improved finances.

"Gov. Arnold Schwarzenegger's fiscal 2008 revised May budget proposal reflects a positive budgetary basis balance at fiscal year-end despite a large general fund balance drawdown. A structural deficit remains, although slightly smaller than the fiscal 2007 figure," S&P said in a statement.

S&P ratings analyst David Hitchcock held out the possibility the firm could raise its rating on California's general obligation debt from its current "A-plus" rating, depending on the outcome of budget talks in the state's legislature over a spending plan for the state's next fiscal year starting July 1.

Tom Dresslar, a spokesman for state Treasurer Bill Lockyer, welcomed S&P's move but said California must come to grips with its structural budget deficit before it gets its hopes up that Wall Street will raise its credit rating and lower its borrowing costs.

"It's a step in the right direction," Dresslar said of the improved outlook. "But we have got to continue to make strides to improve our fiscal situation."

Hitchcock in a telephone interview with Reuters said he expects lawmakers will produce a budget plan close to the revised budget proposal Schwarzenegger unveiled in May.

Thanks to a strong state economy, the Democrat-led legislature and the Republican governor are not far apart on how large next year's budget should be and are debating proposed spending cuts that are relatively small, Hitchcock said.

"We don't really expect any major surprises because the economy has been doing relatively well," Hitchcock said.

S&P and Fitch Ratings have "A-plus" ratings on California's general obligation debt. Moody's Investors Service rates it "A1."

Moody's analyst Emily Raimes told Reuters her firm is holding its outlook on California's general obligation debt at stable because the firm wants to see state policy-makers take action on the structural deficit.

Fitch Ratings analyst Douglas Offerman said his firm has no immediate reason to lift its outlook on the debt from stable. "We are eager to see what the results of budget negotiations are," he said. "Concerns that have been in place remain in place."

S&P also assigned its "A-plus" rating to $2.5 billion in various-purpose general obligation debt that California will sell next week and affirmed its "A-plus" rating on the state's general obligation bonds.

Earlier on Monday, Moody's assigned an "A1" rating to the $2.5 billion in debt and Lockyer unveiled radio advertising that will encourage individual investors to buy the public works bonds fee-free through a Web site, a first-of-its-kind effort for the most populous state.

Lockyer is offering the debt, which Fitch rated "A-plus" on Friday, to individual investors on June 18 and 19 through www.Buycaliforniabonds.com before opening the sale to institutional investors on June 20.