California received a Valentine from Standard and Poor Tuesday in the form of a credit upgrade, which elevated the state’s rating from "stable" to "positive."
"The credit rating should not have a large-scale effect, but it’s certainly indicative of a positive trend in terms of achieving closer to a balanced budget in the state," said Paul Habibi, former investment banking associate and real estate professor at UCLA’s Ziman Center.
The Feb. 14 upgrade is contingent on the passage of Gov. Jerry Brown’s 2012-13 budget, which calls for $12.5 billion in spending cuts.
Those cuts likely contributed to Tuesday’s decision to buoy California’s credit rating, experts said.
"Barring any other credit deterioration, we think the state is poised for credit improvement -- and potentially a higher rating -- pending its ability to better align its cash performance and budget assumptions," Gabriel Petek, S&P credit analyst, said in a statement.
The news comes on the heels of a fiscal blow. Revenues came in $528 million below January projections, according to State Controller John Chiang’s report published Feb. 10.
"January revenues were disappointing on almost every front," Chiang said in a statement.
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If those revenues continue into the red, the state could lose its footing from the latest fiscal leap. But S&P seemed sure in California’s ability.
Brown described S&P’s rating boost as a “powerful vote of confidence” in the state, which has been wrangling with budget cuts across the board – from schools to social programs.
S&P "believes that by downsizing its spending base, the state has corrected a significant portion of its budget imbalance," Petek said.
Although Golden State residents won’t feel the effects of the credit upgrade, California’s imperiled budget would get the relief.
A healthy credit score usually lowers borrowing costs for governments, much like it does for people, Habibi said. The interest rates on state bonds are directly related to the state’s credit score.
When the credit score goes down, interest rates go up. And this scenario can be seen in the financial calamity plaguing many European nations.
Italy, for example, had a 5 percent interest rate on bonds before fear that the country’s economy could worsen hiked that interest rate up to 7 percent, Habibi said.
It may seem small – only two percentage points – but that change amounts to a 40 percent increase on the country’s borrowing costs, he added.
The debt ceiling debacle that snarled Washington, D.C., last summer resulted in S&P downgrading the U.S. credit rating. But while that did not affect the country’s overall borrowing rate, a smaller economy – like that of California’s – could be impacted by such a move.
"I don’t think it will have a significant impact," Habibi said. "But the main take away is, it’s a step in the right direction."
California’s $73.37 billion in general obligation debt earned the state an A-, a relatively low grade for a U.S. state, according to S&P. That grade reflects S&P’s weariness over the state’s vulnerability to liquidity shortfalls.
California was last rated in 2007, when the state’s economy was given a “positive” outlook, Habibi said. The rating was lowered to "negative" between then and July 2010, when the state was elevated to "stable" following Brown’s budget approval.
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