The Breakdown

Explaining Southern California's economy

Standard & Poor's upgrades California's bonds...but state is still in the bottom two

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49073 full

Hot on the heels of lowering Illinois' general obligation (GO) bond debt one notch, from "A" to "A-", Standard & Poor's raised California's GO debt to "A" from "A-".

So California is now the second lowest rating U.S. state, among those whose debt S&P rates.

It was S&P's first upgrade for the state since before the financial crisis.

I talked to California Treasurer Bill Lockyer after the announcement, and he credited the combination of Prop 30 — the ballot measure passed last November that raised sales taxes and income taxes on wealthy Californians — along with improved fiscal discipline for prompting the upgrade.

Another agency, Fitch Ratings, is also keeping an eye on California's improving finances. Doug Offerman, an analyst I spoke with last year, wouldn't put a timetable on a possible upgrade, but he did indicate that Fitch likes the math Prop 30 delivers:

“The economy in the state has actually picked up some steam, particularly in the last couple of months," he said. "Certainly the passage of measures that allow the general fund to receive additional tax revenues both from personal income-sales but and also from corporation taxes provide some relief for the general fund.”

California is Fitch's lowest-rated state for GO bonds.

A low "credit score" for the state's $80 billion in debt means that it costs more in interest payments to issue new debt and refinance old debt. 

Lockyer and the analysts I've talked with acknowledge that a continuing issue for the state is its dependence on the incomes of the richest Californians to bring in enough revenues to make the state budget work. In that sense, Prop 30 is a good short-term fix, but it does double-down on taxing wealthy Californians. So if another bust comes along, that could increase the effect on the state budget, say economists who study state finances.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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