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California's Bond Rating Upgraded by S&P, But Still 2nd Worst in Nation

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by Laird Harrison and Jon Brooks

Take that, California-fiscal-situation-basher Mitt Romney.

It's not just Gov. Jerry Brown who thinks the state's future looks bright -- or at least brighter. California's improved budget has prompted Standard & Poor to upgrade its rating of the state's long-term debt from A- to A. But don't start pushing for "We're in the Money" as the state anthem just yet: despite the upgrade, only Illinois has a worse bond rating among the states.

Says S&P:

The upgrades reflect our view of California's improved fiscal condition and cash position, and the state's projections of a structurally balanced budget through at least the next several years. As part of Governor Jerry Brown's recent budget proposal and multiple-year plan, the state would also largely retire its backlog of payment deferrals and internal loans. 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.

From the Los Angeles Times ...

The California upgrade is the first by S&P since May 2006, before the severe recession of 2007-09, the state treasurer's office said ...

The higher rating should benefit California taxpayers by lowering the state's borrowing costs when it sells bonds this spring, said Lockyer spokesman Tom Dresslar.

While S&P cited California for improvements in its finances, the full analysis showed that the state has a long ways to go before it regains the top "AAA" rating it last enjoyed in 1986. Full story

S&P offers several caveats to the upbeat outlook, including large liabilities for retirement benefits, the expiration of the temporary tax hikes mandated by Prop 30 in seven years, and this one, which probably has Republicans nodding their heads ....

Given that fiscal restraint has been a crucial ingredient to the state's strengthening financial position, we think the budget process itself contains some risk. After implementing significant program cuts in consecutive years, we anticipate there could be political pressure to restore services that would entail higher costs and could undermine the state's nascent fiscal balance.

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Full report from Standard & Poor's:

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