State’s Credit Rating Gets 1st Boost in 2 Years

California’s credit rating rose Wednesday for the first time in nearly two years, signaling Wall Street’s approval of the state’s efforts to bring its chronic budget deficit under control.

The upgrade from A to A+ by the rating agency Standard & Poor’s moves California out of last place in the rankings to second-to-last -- just ahead of Louisiana -- and a safe distance from the near-junk bond status the state had in early 2004.

The new rating could lower the price of California’s borrowing at an opportune time for Gov. Arnold Schwarzenegger and lawmakers, who are seeking voter approval for a major public works borrowing package in November. State budget analysts estimate that if voters approve the $37.3-billion in bond sales, the credit rating upgrade could save taxpayers about $35 million per year in interest on those bonds.

The improved rating “means millions and millions of dollars to the California taxpayers.... It’s huge savings,” Schwarzenegger said Wednesday after signing a bill to place one of four public works bond measures on the November ballot.

Schwarzenegger said the money the state saves can be used for “education, toward our universities and community colleges, and so on.”

But Standard & Poor’s warned that the state still has considerable work to do before its credit rating is upgraded much further. The agency expressed concern about the state’s inability to bring its books into long-term balance.

State Department of Finance projections show that even if California pays off billions of dollars of debt early, as the governor proposed in his revised budget last week, California would still start fiscal 2007-08 with a $3.5-billion shortfall.

“California’s inability to wholly eliminate its structural deficit despite prosperous economic conditions.... remains a credit concern,” said Standard and Poor’s credit analyst David Hitchcock.

Eliminating that gap next year will be tough, analysts said. They cautioned Sacramento not to expect a return of the revenue spike that will allow lawmakers to close with relative ease the budget gap for the year that begins July 1.

Stock market gains and a continuing hot real estate market helped produce $7.5 billion in unanticipated revenue through fiscal 2006-07. Analysts say roughly 13% of all state revenue this year came from such gains and may not return.

The last time so much of the state’s revenue came from such unpredictable sources was at the height of the technology stock boom in the late 1990s. Lawmakers used that revenue boost to expand a number of programs the state could not afford once the economy weakened.

“The idea that maybe these revenues will continue can be addictive,” said Steven Zimmerman, who also analyzes the California budget for Standard & Poor’s. “It’s important to acknowledge they can dissipate.”

Christopher Thornberg, a senior economist at the UCLA Anderson Forecast, said the state could be in for some tough times next year because “the real estate bubble is popping right now.”

The governor and lawmakers say they will heed such warnings and take a cautious approach as they craft a budget agreement in the coming weeks.

Schwarzenegger’s budget plan seeks to limit new state spending commitments. Although the considerable increase in schools funding that Schwarzenegger wants could put pressure on future budgets, that pressure would be eased by the early debt reduction.

Lawmakers have until June 15 to negotiate and approve a budget. Democrats, who dominate both the Senate and Assembly, say they will resist expanding government programs. “Part of the reason the credit rating has improved is the Democratic leadership is not talking about new spending and new programs,” said Assembly Speaker Fabian Nunez (D-Los Angeles). “We’ve tightened our belts.”

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Times staff writers Peter Nicholas and Nancy Vogel contributed to this report.