LOS ANGELES -- Standard & Poor's Corp. yesterday raised its ratings on $3.6 billion of California lease obligations, citing recent legislation that clarifies the state's ability to make appropriations if a budget is not in place.

The upgrade covers various California Public Works Board lease revenue bonds -- including a $375 million refunding planned this week -- and also covers numerous appropriation-backed issues for assorted University of California and state university projects.

Standard & Poor's lifted bonds with A-minus ratings to A levels, while bonds previously rated BBB-plus rose to A-minus. Bonds with a provisional rating continued to carry that notation.

California Senate Bill 42, which was signed into law July 16, helped prompt the upgrade, Standard & Poor's said in a release.

"S.B. 42 provides for continuous appropriations for state lease purchase obligations in the event a budget is not in place by the time such appropriations are required," the release said. "The statute further provides that, in the event appropriations for such obligations are omitted form any budget act, they are nevertheless appropriated."

A protracted state budget delay a year ago raised concern over the state's legal ability too make debt service payments on its lease-related obligations. The concern centered on the state's legal authority, in the absence of a budget, to appropriate lease payments.

The state averted problems last year because the attorney general's office and other counsel provided an opinion that the state controller had continuing authority to appropriate lease payments on bonds. The maneuvering let the state make a timely payment of debt service payments in cash, rather than relying on interest-bearing IOU or dipping into debt reserve funds.

Afterward, state officials said they believed they could rely on the same authority again to make lease appropriations in the event of any future state budget stalemates.

But rating agency officials said they would take more comfort if the state passed a law providing permanent authority for the state to make rental and energy service contract payments without an enacted budget.

The new law "represents a significant improvement" over the situation that arose a year ago, when "less explicit statutes provided the state with some authority to meet those obligations at the time," Standard & Poor's said yesterday.

Earlier this year, state Treasurer Kathleen Brown provided testimony in support of S.B. 42, saying its passage could help ease market uncertainty.

In announcing the upgrade, Standard & Poor's observed that "state lease payments generally remain subject to the state's beneficial use and occupancy of the individual leased facilities. Thus, abatement for damage, destruction, or condemnation of the leased assets remains a rating factor. However, this risk is mitigated through the standard insurance and debt service reserve requirements."

In March, Moody's Investors Service also commented that it would look favorably on passage of S.B. 42.

"Passage of this legislation will be a key rating consideration in future reviews of the state's leasebacked debt," Moody's said in a rating comment on a previous issue by the state public works board.

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