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Wall Street Firm Upgrades State's Credit Rating

February 27, 1996|DAVE LESHER | TIMES STAFF WRITER

SACRAMENTO — Wall Street recognized the state's improving financial condition Monday as one of the nation's three major bond rating agencies upgraded California's credit rating for the first time since the recession set in more than six years ago.

In a statement explaining its decision to raise the California rating from A to A+, Fitch Investors Service in New York concurred with recent predictions of healthy growth in the state's economy. It also praised the state government for eliminating a four-year budget deficit and proposing a cash reserve of nearly $500 million.

"California's economy has been exhibiting recovery from an unexpectedly harsh recession for some time," the agency said in a statement Monday. "With the elimination of the deficit, an improved cash position and some good prospects of growth, credit quality has improved."

State officials are optimistic that the two other major rating agencies--Moody's Investors Service and Standard & Poor's Corp.--will also upgrade the state's borrowing ability in the next few days.

Fitch, along with Standard & Poor's, has been lowering the state's credit rating ever since California held the highest, or AAA, rating in 1987. Moody's held California at the AAA level until 1989.

For Fitch, the modification to California's rating represented a slight uptick, still placing the state several grades below the highest rating. But the credit rating is considered a highly visible sign of the state's fiscal health, and officials were working hard to portray the change as the first sign of things to come.

"Today marks another sign of California's economic recovery," Gov. Pete Wilson said at a news conference Monday evening. "This is good news. And it is obviously the kind of thing I enjoy telling you."

Fitch ratings range from AAA, described as "highest credit quality," to D, representing bonds in default with the lowest potential for recovery. California's new A+ rating is described, along with A and A- ratings, as given to bonds of "investment grade and of high credit quality."

"The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings" such as AA-,AA, AA+, and AAA bonds, according to Fitch.

Wall Street analysts also said the state's improving credit status was expected since the economy has shown signs of recovery and the state appears to have avoided damage to its reputation from the financial crisis in Orange and Los Angeles counties.

"We have been feeling for a while that California appears to be improving," said Joe Piraro, who manages a $2.5-billion municipal bond portfolio for Van Kampen American Capital in Oakbrook Terrace, Ill. "I wouldn't be surprised to see one of the other rating agencies follow suit. . . . It does appear that problems of the past--including the Orange County and L.A. County situations--are not as severe as they used to be."

Barbara Flickinger, an assistant director with Moody's Investors Service Inc. in New York, confirmed that her agency is reviewing the state's rating and added, "We recognize that the California economy is turning around and the cash position is improving."

The ratings announcement follow a trip to New York in January by state Finance Director Russell Gould, who opened the state's budget books to each of the three credit agencies in anticipation of a $180-million sale of general obligation bonds scheduled for today.

Wilson attributed the change to the state's tightfisted budgets that have held spending below revenues for the past four years. This year, state officials have also predicted that the state's economy is improving so rapidly that it will generate a budget surplus of at least $1 billion by June.

Wilson qualified his remarks, warning that the good news does not mean "we can rest on our laurels." He called on the Legislature to enact a package of economic reforms he has proposed that include a 15% cut in personal and corporate income taxes.

"It is time for the Legislature to do all that it can do to make California competitive," he said.

The credit rating will determine the cost to California of selling about $18.6 billion in general obligation bonds that have been authorized but not released. The bonds are intended to finance a range of projects such as schools, prisons and roads.

State officials said they had not yet calculated how much savings the rating improvement would represent for the state.

Since 1991, when state lawmakers faced a record $14-billion deficit, California has been forced to borrow money annually to pay its bills, giving it an unwelcome reputation on Wall Street as "Uncle Sam Jr."

Last summer, when lawmakers approved the state budget, they planned to have the deficit paid off by June. During the fall, however, California's economy surged so much that coffers overflowed with more than $700 million in unexpected revenue by November.

Economists attributed the boost to healthy gains in foreign trade, the entertainment industry and electronics companies. They said they were surprised by the performance because it came even though housing construction is still lagging and the aerospace industry is still downsizing.

In its report Monday, Fitch also warned that there are "uncertainties which necessarily accompany an economy in transition."

And, as Wall Street investors have complained before, it said the state's financial integrity is compromised by the budget restrictions required under Proposition 13's property tax rules and Proposition 98's automatic trigger for education funding.

Times staff writer Debora Vrana contributed to this report.

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