S&P BOOSTS CALIFORNIA'S CREDIT RATING ANALYSTS CREDIT ARNOLD'S RECOVERY PACKAGE FOR STATE.

Byline: David M. Drucker Sacramento Bureau

SACRAMENTO - Despite concern over lingering state deficits, Standard & Poor's raised California's credit rating three notches on Tuesday and removed it from a ``credit watch.''

The credit upgrade from a ``BBB'' to an ``A'' still leaves California with the worst rating of the 50 states. But for average Californians, it means fewer of their tax dollars will be spent paying interest on the bonds that finance public projects.

Analysts saw it as validating Gov. Arnold Schwarzenegger's decision to seek voter approval last March for a $15 billion economic recovery package, including the unprecedented step of refinancing debt by selling general-obligation bonds, which previously were used only to fund projects such as schools and freeways.

S&P analyst David G. Hitchcock said Wall Street remains concerned with the state's long-term imbalance of revenues versus spending. He added that its worry that California would run out of cash in June and default on $14 billion in loans was averted because of the governor's decision to refinance that debt.

``At least that sort of liquidity concern is eliminated,'' Hitchcock said. ``The concern is in '07 there's been promises made to increase expenditures.''

Economists and bond buyers remain cautious of the state's long-term imbalance between revenues and expenditures, although they see signs of an improving California economy and increasing tax revenues.

The Schwarzenegger administration said the state also regained the trust of Wall Street bond buyers as a result of Propositions 57 and 58 - the $15 billion in bonds to refinance state debt and a constitutional spending limit - as well as the $105 billion budget that leaves the state with a projected $5 billion deficit to begin the 2005-06 fiscal year.

``It's a clear signal to investors in both this country and abroad that Wall Street is once again being bullish on California,'' said H.D. Palmer, the Republican governor's chief budget spokesman.

Democratic state Treasurer Phil Angelides and other critics say the governor has not done enough.

Angelides, expected to run for governor in 2006, said in a statement that Schwarzenegger's unwillingness to end deficit spending could impede the state's ability to make a full economic recovery.

``Unfortunately, Gov. Schwarzenegger's budget this year places us in continued jeopardy. As Standard & Poor's noted today, its lowest-in-the- nation rating for California reflects the fact that the governor's budget relies on substantial amounts of long-term borrowing.''

The S&P announcement followed earlier upgrades of the state's credit rating by Wall Street firms in recent months.

In March, Moody's Investors Service upgraded California's credit. Earlier this month, Fitch Ratings took the state off a negative credit watch although it left the state's credit unchanged.

David M. Drucker, [phone]

david.drucker(at)dailybulletin.com