If California can reach a balanced budget by summer, the state’s low credit rating may turn a corner.
On Tuesday, Standard & Poor's improved California's bond outlook from stable to positive.
The move is a sign that the state might be poised for a credit-rating upgrade if lawmakers continue to cut spending and if tax revenue meets projections.
Although California still faces a $9.2 billion deficit, the credit rating agency said the state has corrected a significant portion of its budget imbalance.
"We are revising the outlook because, barring any other credit deterioration, (we) think the state is poised for credit improvement -- and potentially a higher rating -- pending its ability to better align its cash performance and budget assumptions," S&P analyst Gabriel Petek said in a statement.
A higher rating is contingent on sufficiently credible solutions to the state's $9.2 billion deficit the report said.
That would include automatic spending cuts that are not subject to changes after the November election, if voters reject Gov. Jerry Brown's tax hikes.
Brown has proposed a mix of cuts and temporary tax hikes but Democrats who control the Legislature are opposed to more cuts.
Revenues, however, remain a concern. Last week, the state controller's office released its latest monthly report showing tax collections came in $528 million below the January projections in the governor's proposed budget.
"Our rating is still near the bottom when compared to other states," Senate Republican Leader Bob Huff, R-Diamond Bar, said in a statement. "While this is movement in the right direction, Californians should delay celebration until we're closer to the top than the bottom."
The last time the rating agency gave California a positive outlook was June 2007, when it had an A-plus rating. It now has a rating of A-minus.
California's outlook improved from negative to stable last July after the last budget was passed.