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SACRAMENTO-Standard & Poor’s removed California’s general obligation bonds from its negative credit watch list Tuesday. Last month’s budget deal “significantly reduces state expenses and provides a path to improved financial liquidity,” the ratings agency said.

As part of the move, S&P affirmed its A rating on the bonds and shifted them to its less dangerous negative “outlook,” reflecting S&P’s lingering concerns about the state’s budget picture in the six-month to two-year time frame, according to State Treasurer Bill Lockyer. The negative “watch” reflected more immediate concerns about the State’s budget and cash condition, he said.

“S&P’s action is a positive development for the state and taxpayers,” State Treasurer Bill Lockyer says in a prepared statement. “It reflects confidence that the budget solution adopted by the governor and legislature gets us on the right track and improves our cash position.”

The state’s $67 billion of general obligations bonds went on the rating agency’s negative credit watch in mid-June, as legislators and Gov. Arnold Schwarzenegger struggled to find common ground for closing a $24-billion budget deficit for the fiscal year that began last month.

The state’s improved bond rating comes just a couple of days after Lockyear announced a $10.5-billion cash-flow borrowing plan, including a $1.5-billion interim loan that will allow the state to stop issuing IOUs on September 4.

“This plan is a crucial step toward restoring some fiscal order to California,” he said. “Its successful implementation will rid us of the financial hardship and stigma caused by IOUs, and ensures the state has enough cash to provide crucial public services for the rest of the fiscal year.”

The state typically borrows in the fall to provide money needed to fund operations during months when the revenue flow ebbs. The $10.5 billion figure represents the State Controller’s determination of the borrowing need, based on the controller’s stress-testing of Department of Finance cash-flow projections.

The State Pooled Money Investment Board will meet on August 21 to set Sept. 4 as the date on which the State will pay off IOUs and stop issuing them. Recipients may redeem their IOUs either in person at the State Treasurer’s Office or via mail.

The State Treasurer’s Office expects to secure a $1.5-billion interim loan to pay off IOUs–registered warrants–by Aug. 28. The loan will involve the sale of short-term, “interim” Revenue Anticipation Notes (RANs). In mid-September the State Treasurer will sell $10.5 billion of RANs to pay off the interim loan and meet the state’s cash flow needs through 2009-10.

The September RANs will be offered to individual investors. Lockyear’s office will use its Buy California Bonds program to make the transaction known to individual investors and help them purchase RANs through broker-dealers.

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