Moody's Investors Service on Wednesday upgraded its rating on California's general obligation debt to "Aa3" from "A1," citing the state's improving financial position and employment growth.
The one-notch upgrade stamps California GO debt with its highest rating from Moody's since 2001. That was when the dot-com bust hit the state's economy hard, prompting a series of credit downgrades from which it has been slow to recover due to years of chronic budget problems.
Moody's move comes just five days after Governor Jerry Brown signed a $156.3 billion budget for the next fiscal year, featuring an improved revenue outlook thanks to voter-approved tax increases and a recovering economy. When Brown, a Democrat, took office in 2011 from two-term Republican Arnold Schwarzenegger, the state faced an 18-month budget gap of $25 billion.
"California in the last three years has made great strides in managing its financial affairs," California Treasurer Bill Lockyer said in a statement responding to the upgrade.
Along with the GO upgrade, the ratings agency also lifted its ratings on most other categories of related debt by one notch.
Moody's is the last of the three major ratings agencies to upgrade California's rating since Brown began taking measures to repair the state's poor fiscal position three years ago. Standard & Poor's and Fitch Ratings both upgraded the state by one notch to "A" last year, although their ratings are now two notches below the equivalent Moody's rating.
As recently as 2010, Moody's considered California's creditworthiness to be just three levels above speculative grade, or junk. With the latest upgrade, the state would now be considered a high-grade credit, although Moody's noted that "Aa3" remains a relatively low rating for a U.S. state.
Of the 47 states rated by Moody's, just two - Illinois and New Jersey - have lower ratings, while 42 have higher ratings.
"The Aa3 rating also reflects the state's volatile tax revenue structure and governance restrictions," Moody's said. Moody's outlook on the state is stable.
California bonds were outperforming the wider municipal bond market on Wednesday afternoon and its yield spread was the narrowest in nearly seven years.
The yield on its GO bonds due in 2020 fell by 8 basis points in secondary market trading to 1.6 percent from 1.68 percent on Tuesday. The yield on comparable AAA-rated bonds fell by just 3 basis points, according to Thomson Reuters Municipal Market Data.