California Outlook Raised to Positive by S&P on Brown Budget

California had the outlook on $75.4 billion of general obligations raised to positive from stable by Standard & Poor’s, which said Governor Jerry Brown’s plan to pay down debt and build reserves may lead to an upgrade.

Brown’s proposed budget, released last week, builds upon improvements in the state’s finances in recent years, the rating company said in a report today. If lawmakers pass a spending plan with the governor’s provisions, California’s credit could rise one step, to A+, within two years, the company said.

The positive outlook “is an extension of the much stronger approach to fiscal management that the state has followed in the last three years,” Gabriel Petek, an S&P analyst based in San Francisco, said by telephone. “It puts the state in a position where it could be looking like a higher-rated credit.”

Brown last week proposed a record $106.8 billion budget as the coffers of the most populous U.S. state brim with the biggest surplus in more than a decade. The 75-year-old Democrat, who may seek another term this year, called for an 8.5 percent increase from current spending, with $11 billion to pay off loans that papered over previous deficits, and $1.6 billion in reserves, while increasing funds for schools, welfare and health care for the poor.

“This is another reflection by the financial markets that the governor is continuing to make fiscal progress,” H.D. Palmer, a spokesman for Brown’s budget office, said in a telephone interview.

Constitutional Amendment

Brown also said he’ll back a constitutional amendment to stockpile unpredictable revenue from capital-gains taxes and deal with predicted shortfalls in public pensions.

“This year the news is very good, but by no means are we out of the wilderness yet,” the governor said at a Jan. 9 briefing. “We must be very prudent in how we spend public funds.”

About a year ago S&P raised California’s grade for the first time since 2006 to A from A-. The state still has the second-lowest rating among U.S. states, ahead of only Illinois.

More bonds traded today from California and its localities than those of any other state, according to data compiled by Bloomberg. Dealers sold more securities to clients than they bought, signaling stronger demand to own the debt.

Tax-exempt California general-obligation bonds maturing in November 2027 extended gains after the outlook change. The debt changed hands at an average yield of 3.62 percent, the lowest since Nov. 1, data compiled by Bloomberg show.

“It properly recognizes the significant progress California has made in its fiscal practices,” said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer. “It reinforces the importance of adopting a fiscal year budget that ends up looking a lot like the governor’s plan.”

To contact the reporters on this story: Michael B. Marois in Monterey, California at mmarois@bloomberg.net; Brian Chappatta in New York at bchappatta1@bloomberg.net

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

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