California Credit Rating Boost Possible, S&P’s Petek Says

California may see its credit rating raised if Governor Jerry Brown persists in paying down debt and revenue continues to outpace spending, Standard & Poor’s analyst Gabriel Petek said.

S&P raised the most indebted U.S. state’s rating to A, its sixth-highest level, in January, saying policy makers had made strides toward improving California’s fiscal health.

“What we are keeping a close eye on is the state’s revenue performance relative to the budget assumptions,” Petek said at the Bloomberg Link State & Municipal Finance Conference in New York. “What we are looking for in the governor’s upcoming proposed budget is for them to continue to work off this so-called wall of debt. If these two things continue to proceed as the governor has set forth, we think there is potential for another rating upgrade.”

Brown, a Democrat, won voter approval a year ago for temporary higher sales and income taxes to end persistent deficits of a combined $100 billion since 2007. He also pledged to pay down debt accumulated in previous years when lawmakers resorted to gimmicks and accounting tricks to balance the budget amid legislative impasses over how to erase resurgent deficits.

Under Brown, the state paid off $7.3 billion of that debt in fiscal 2013, which ended in June, leaving $27 billion outstanding, according to S&P. His latest budget calls for paying off about 30 percent of the total by the end of the current fiscal year.

The spread on the state’s 10-year bonds was about 0.34 percentage point yesterday, near the lowest since November 2007, according to a Bloomberg index. That’s down from 1.7 percentage points in July 2009, when an impasse over how to close a budget deficit led the state to issue IOUs to cover spending, data compiled by Bloomberg show.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; Susan Goldberg in New York at sgoldberg31@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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