Standard & Poor's improved California's bond outlook from stable to positive Tuesday, a signal that the deficit-ridden state could be in line for a ratings bump.
S&P analyst Gabriel Petek said S&P believes there's at least a 1 in 3 chance that California's rating could rise from A-minus to A sometime in the next two years. The state's A-minus is currently S&P's lowest among U.S. states.
In a 15-page analysis, S&P said that the state's new majority-vote budget requirement is a major reason why the state now has a positive outlook. Voters approved the requirement in 2010 in Proposition 25, which also docks pay if lawmakers submit a late budget.
S&P also credited a rise in revenue growth as the economy recovers, as well as a series of recurring budget cuts that Gov. Jerry Brown and Democratic lawmakers enacted last year.
"The revision to the process governing budget adoption has, in our view, lowered the state's recurring risk of experiencing liquidity crises as a result of late budget enactment," the report states. "We also believe that the state's recent structural spending reductions have helped lay the groundwork for improved cash performance on an intrayear basis."
If the state does not approve taxes to help bridge the deficit this fall, Petek said lawmakers and Brown need to ensure that strict trigger cuts are in place beforehand. The governor has proposed mostly slashing payments to K-12 schools and higher education.
"If they leave it open to political wrangling in November, the rating outlook itself could turn back from positive to negative," Petek warned.
The state's cash and budget situations are related, but separate, matters. The state can have a balanced budget while still incurring a significant cash deficit. California has to borrow from special state funds and from Wall Street to pay bills each year, in part because the state's tax revenues do not flow evenly throughout the year and the budget has fallen out of balance in recent cycles.
The state's cash situation remains rocky, as state Controller John Chiang indicated earlier this month when he warned that California was in danger of running out of cash. State fiscal leaders believe that problem has been solved by some interim borrowing and delayed payments. While the state faces cash challenges, Petek said S&P is looking beyond the recent blip and believes California is on an improved long-term path.
The report states, "The possibility for a higher rating, therefore, depends upon our assessment of the state's ability to better unify its budget and cash performance. We could raise the ratings within a two-year time frame if the state enacts a timely budget with realistic and largely structural solutions to its projected budget deficit."