STATE'S OUTLOOK BRIGHTENS GOVERNOR'S RECOVERY PLAN WINS FAVOR FROM WALL STREET.

Byline: David M. Drucker Sacramento Bureau

SACRAMENTO - Gov. Arnold Schwarzenegger's economic recovery plan won the blessing of Wall Street on Friday when Moody's Investor Services upgraded California's credit rating for the first time in four years and said the state's economic outlook was positive.

In an unusual move, Moody's acted without waiting for the Legislature to vote on Schwarzenegger's $103 billion spending plan for 2004-05. The firm's analysis cited gains in statewide employment, an uptick in state tax revenues and a stronger cash position thanks to voter approval of the governor's $15 billion economic recovery plan.

Although Schwarzenegger's budget would increase spending 5.9 percent and lead to multibillion-dollar deficits in future years if nothing more is done, Moody's credited his plan with providing realistic, politically achievable solutions.

``We believe this budget looks more politically feasible than budgets we've seen for a while in California,'' Moody's analyst Timothy Blake said.

Schwarzenegger, who was in Los Angeles for a round of interviews with foreign journalists, called Moody's upgrade ``fantastic news'' that shows faith in his revised budget and a state economy that continues to brighten.

And he urged legislators to fulfill this vote of confidence by approving his budget by June 15, the Legislature's official deadline.

``We should now return the favor by doing the right thing, and that is for the Legislature to get this balanced and responsible budget passed on time,'' Schwarzenegger said in a statement.

State Treasurer Phil Angelides said he was pleased by the development although much work remains to be done.

``Today's rating upgrade is welcome news, as it might help lower the state's future borrowing costs. We must now focus on the ongoing structural imbalance in the state's budget, a key step toward restoring California's strong credit rating.''

Even though Moody's upgraded the state's credit rating to A3 from Baa1, California still has a low rating compared with other states, Angelides also pointed out in his prepared statement.

Moody's decision to upgrade California from near junk-bond status came a day after Standard & Poor's chose to leave the state's rating unchanged, although its outlook was similarly positive.

Fitch, the third of the three major Wall Street rating institutions, has yet to render a verdict on Schwarzenegger's $102.8 billion budget proposal for the fiscal year that begins July 1.

Standard & Poor's has decided not to change its rating until after the Legislature votes and Wall Street sees the budget the governor actually signs.

Michael Bazdarich, a senior economist with the UCLA Anderson Forecast, was surprised at Moody's upgrade, especially since nonpartisan Legislative Analyst Elizabeth Hill said last Monday that Schwarzenegger's budget would lead to future deficits totaling $22 billion in years 2006-07 through 2008-09.

``I don't know what we did to warrant it,'' Bazdarich said. ``The previous governor papered over (the deficit) for three years and lost his job over it, and our new governor basically did the same thing right out of the box.''

The upgrade by Moody's could save taxpayers millions of dollars in borrowing costs related to the interest the state pays on general obligation bonds - used to finance public-school and infrastructure construction - as well as the remaining $3.7 billion in Proposition 57 deficit-financing bonds approved by voters in March.

Blake said Moody's was concerned about California's long-term deficit. But he called the state's debt burden manageable, and said he was impressed by an employment-growth rate that has outpaced the rest of the nation, as well as higher sales and personal-income tax receipts.

Schwarzenegger's budget plan also played a significant role in Moody's assessment. By backing away from many of the contentious spending cuts he proposed in January for taxpayer-funded health care and welfare services for the poor, the Republican governor's revised budget - which does not raise taxes - is much more palatable to the Democrat-controlled Legislature.

Still, Schwarzenegger has more work ahead of him if the state's credit rating, still one of the lowest in the nation, is to climb back to respectability.

``We're not saying the state will be able to grow out of the (budget) gap,'' Blake said. ``They will need to make policy changes to right the ship.''

David M. Drucker, [phone]

david.drucker(at)dailybulletin.com