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Fitch Raises California to A on Brown’s ‘Sound’ Budgeting

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Aug. 6 (Bloomberg) -- Fitch Ratings raised its grade for California’s bonds, citing its economic recovery and “timely, more structurally sound” budgets, leaving Illinois the lowest-scored by all three major ratings companies.

Fitch boosted the most-populous state debt one step to A, sixth-highest level, yesterday. It was the company’s first upgrade of California since 2010 and the state’s highest score from Fitch since 2009.

Governor Jerry Brown, 75, persuaded voters in November to boost income and sales taxes to end deficits that cumulatively exceeded $100 billion since 2007. He built into his plan an $850 million surplus, California’s first in about a decade.

Fitch was the last of the three biggest rating companies to grade California and Illinois at the same level. Fitch cut Illinois in June to A-, four levels above junk. Moody’s Investors Service and Standard & Poor’s have the fifth-most-populous state at an equivalent level.

Fitch cited Brown’s efforts to erase recurring budget deficits, pass budgets on time and ease California’s reliance on borrowing for operating expenditures.

“Fitch believes that these gains provide the state with a greater capacity to address future fiscal and budgetary cyclicality,” according to a report. “However, California’s credit standing is likely to remain lower than most states for the foreseeable future given the magnitude of the state’s budgetary and financial challenges.”

The action came as California plans to sell $5.5 billion in revenue-anticipation notes Aug. 15. Fitch rated the notes F1, its second-highest for short-term debt.

Investors in the $3.7 trillion municipal-bond market demand about 1.52 percentage points of extra yield above benchmark AAA munis to own Illinois general-obligation debt maturing in 10 years, data compiled by Bloomberg show. Buyers require only 0.36 percentage point above top-graded munis to own similar-maturity California securities.

To contact the reporters on this story: James Nash in Los Angeles at +1-323-782-4234 or Jnash24@bloomberg.net; Brian Chappatta in New York at +1-212-617-0698 or bchappatta1@bloomberg.net

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net

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