Standard & Poor's upgraded California's general obligation bond rating from A-minus to A on Thursday, a significant move that lifts the state out of the ratings agency's basement.
The boost also is likely to result in lower borrowing costs for the state.
In the midst of recessionary state budget woes, S&P lowered California from A-plus to A in February 2009 and down to A-minus in January 2010. California's upgrade comes after the agency dropped Illinois last week to A-minus due to pension problems, now leaving the Midwest state with the worst-in-the-nation status.
After voter-approved tax hikes and cuts, Gov. Jerry Brown declared earlier this year that California had finally reached balance between what it spends and takes in. His latest $97.7 billion general fund budget and $145.8 billion in total state spending increases funding for education but generally holds the line on health and welfare programs.
The Democratic governor also wants to devote future growth in state revenue to paying off debt. Democratic lawmakers, who hold a supermajority in both houses, say they intend to remain disciplined, but some want to begin spending more on social services and health care programs that have faced cuts in recent years.
"In the near term, we see economic and revenue performance as key to the state's ability to realize a more stabilized budget," S&P wrote. "But another part of the answer likely rests with state lawmakers."
State Treasurer Bill Lockyer, who oversees state bond sales, praised state leaders and voters for their recent efforts. "When it comes to the state budget, I've called myself the town grouch," Lockyer said in a statement. "I'm in a much better mood these days."
In another potentially positive sign, California is on track to receive $5 billion more in personal income taxes than Brown expected for January. The nonpartisan Legislative Analyst's Office warns that cash burst could simply be the result of unexpected taxpayer response to recent federal and state tax changes, as opposed to surprise economic growth.
S&P listed as California's positives its broad economy, legitimate balanced budget actions and a lower vote requirement for the Legislature to pass budgets. Among the state's risks: a volatile tax system that relies on top earners, debt beyond the state's operating budget and unfunded pension obligations.
"A more streamlined budget, the temporary taxes and a strengthening economy present the state an opportunity to stabilize its finances for at least several years," the S&P report stated. "Over five to seven years, however, the state's credit rating will depend more on lawmaker actions in particular, whether lawmakers stay the fiscal course charted out in recent budgets even while Proposition 30 taxes are in effect and especially as they approach expiration."