State’s Robust Economy Lifts Bond Ratings

California received higher ratings on as much as $28 billion of its bonds from the two leading credit-rating services, which said Thursday that the state’s economic growth warranted the upgrade.

Moody’s Investors Service said its upgrade to “Aa2” from “Aa3” affects $22 billion of California general obligation debt, including $850 million of bonds scheduled for sale Wednesday. Moody’s also raised its ratings on $6 billion of bonds supported by state leases, to “Aa3” from “A1.”

Standard & Poor’s upgraded California’s general obligation bonds to “AA” from “AA-.” Fitch Investors Service also rates these bonds “AA.”

California’s general obligation bonds haven’t been at these rating levels since the early 1990s, before budget problems stemming from a recession prompted downgrades to the single-A rating category. The state’s ratings began rebounding in 1996 as the economy recovered.

The rating increase “reflects the strength and diversity of a state economy” that continues to grow faster than most economists had predicted, Moody’s said in a report.

California, the largest state with 34 million residents, also ranks as the world’s seventh-largest economy, based on gross national product, ahead of China and just behind Italy.

California’s diversified economy should continue to grow faster than the rest of the U.S., Moody’s said, and “the deep customer base of the high-tech sector decreases the likelihood of a statewide economic downturn absent a national recession.”

Rating upgrades generally lower the borrowing costs for a state or municipality because they can sell bonds at lower interest rates.