SAN FRANCISCO, Aug 5 (Reuters) - Citing California's improved finances, Fitch Ratings raised its rating on $72 billion of the state's outstanding general obligation debt to "A" from "A-minus" on Monday, marking its first upgrade of the most populous U.S. state in more than three years.
"Notable progress includes timely, more structurally sound budgets, spending restraint, and sizable reductions in budgetary debt," Fitch said in a statement.
Despite California's stronger finances and its economic and revenue rebound, Fitch said the state is a "long way" from a full fiscal recovery and faces challenges from underfunded teachers' pensions and from its unemployment and prison systems.
Fitch revised its rating outlook to stable from positive and said its rating is "sensitive to the continuation of the state's recent fiscal discipline and its ability and willingness to continue addressing numerous fiscal challenges."
"Additional material progress on reducing budgetary borrowing, maintenance of structural balance and addressing key fiscal risks could result in rating improvement," Fitch said. "Unexpected economic, revenue and cash flow weakness or a return to spending growth without regard to revenue volatility could pressure the rating."
Governor Jerry Brown ended a decade of budget deficits in late June when he signed the state's current $96.3 billion general fund spending plan into law. It includes modest increases in spending, funded by tax hikes approved by voters last year, with an improving economy generating more revenue and fueling a surplus.
The budget also repays internal loans used to balance the state's books over the years, putting this debt on track to drop below $5 billion in the 2016-17 fiscal year from about $27 billion.
Standard & Poor's in January upgraded its rating of California's general obligation bonds one notch to "A" from "A-minus" and put a stable outlook on the state. Moodys' Investors Service rates California at A1.