07/07/2011 04:31 pm ET Updated Dec 06, 2017

S&P Raises California Credit Rating To Stable From Negative

NEW YORK (Edith Honan) - Standard & Poor's raised its credit outlook on California to stable on Thursday in one of the first significant pieces of good news for state and local governments as they work their way out of the Great Recession.

The outlook was revised to stable from negative on what S&P said was the better balance between the money coming and cash being spent on state operations.

The S&P action comes on the heels of a $129.5 billion budget agreement for fiscal 2012 that closed a gap projected to reach $26.6 billion through the end of fiscal 2012.

"The state's economy does seem to show some signs of life and I think the deficit that was projected six months ago ended up being a little smaller than most of us anticipated," said Kenneth Naehu, a managing director at Bel Air Investment Advisors, a California firm that oversees $6 billion in assets.

Like California, state and local governments suffered terribly during the financial crisis as tax revenues crashed and unemployment soared. That caused havoc throughout the $2.9 trillion municipal bond market where investors dumped their holdings on growing fears about the stability of municipal finances.

S&P said its change for California covers the "two-year outlook horizon.

"We believe the enacted budget makes a lot of progress in improving the state's fiscal structure and should reduce the risk to its liquidity," S&P said in the release. "The negative outlook had been linked to the possibility of a recurring cash deficiency that we now believe the enactment of the fiscal 2012 budget is likely to mitigate for the most part."

The rating agency also said California's enacted budget "represents a bit of a missed opportunity" because it did not

address the "backlog of budget obligation accumulated during the past decade."

S&P affirmed its A-minus long-term and underlying ratings on California's general obligation debt, as well as affirmed the A-minus and BBB-plus long-term and underlying ratings on the state's Proposition 1A and appropriation-backed debt.

(Editing by Andrew Hay)

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