Two major ratings agencies on Wednesday improved their outlook for the state's credit, offering the first significant positive news about the condition of California's borrowing power in three years.

Upon passage of Propositions 57 and 58, Moody's Investors Service and Standard and Poor's stopped short of raising the state's near-junk-bond credit ratings but switched their negative outlooks for California to more optimistic forecasts.

"We think that the bonds' approval is a major accomplishment and it stanches, in our view, any further credit deterioration," said Tim Blake, Moody's Investor Services senior vice president for state ratings.

Passage of Gov. Arnold Schwarzenegger's ballot measures on Tuesday signified his second straight epic victory at the polls.

In addition to pleasing the credit ratings agencies, the win cemented the governor's political might and confirmed for many Democrats the need to retreat from their calls for tax hikes.

"Now we can focus on putting together thoughtful spending reforms to move the state toward structural balance over the next couple of years," said Donna Arduin, Schwarzenegger's budget director.

But the passage of Propositions 57 and 58 doesn't cure California's money woes. Rather, it marks the beginning of what still could be a lengthy battle at the Capitol over balancing the state's books.

"Our problem is still significant going forward, and the budget debate now begins," said Assembly budget Chairman Darrell Steinberg, D-Sacramento.

Proposition 57 authorized state government to sell up to $15 billion in bonds to pay off old debts and to help fill budget gaps in the near future. Its companion measure requires lawmakers to enact a balanced budget and bars future borrowing to cover deficits.

The voters' blessing staved off a cash crisis when millions of dollars in short-term loans come due this summer and spared budget writers from making $5 billion more than planned in cuts or other savings.

Even now that the bonds have passed, however, the state cannot simply wipe the red ink off the books and move on.

The bonds do not completely fill in the state's current budget hole, nor do they make permanent changes to repair a long-term imbalance between the state's spending obligations and its revenues.

Analysts from the three major credit ratings agencies - including two that boosted their outlook for the state on Wednesday - cautioned that the one-time fix supplied by the sale of the bonds will not shrink the permanent gulf between the amount the state must pay to provide services and the revenues it brings in.

The bond measure "merely postpones difficult taxation or expenditure reduction decisions," wrote Standard and Poor's analyst David Hitchcock. "Similar liquidity pressures may again arise absent true reform, which would bring ongoing revenues and expenditures into balance."

In the next four months, even with the bond sale, lawmakers must find billions of dollars more in cuts or other cost savings.

Schwarzenegger in January proposed about $12 billion in additional spending cuts and other measures. But those now face the scrutiny of a Democratic-controlled Legislature that is averse to slicing from programs for the poor.

Because voters rejected Proposition 56's proposed loosening of requirements for approving a state budget, Schwarzenegger also must win a handful of votes from Republican lawmakers who dislike plans to take money from cities, counties and universities.

"The size of the pie has now been determined. Now most of the fighting I would assume will be relegated to who gets what pieces of the pie," said Assembly budget committee member John Campbell, R-Irvine.

The size of the remaining gap that the Legislature and Schwarzenegger must fill could grow by millions of dollars because the solutions proposed by the GOP governor carry some large risks.

Schwarzenegger's budget includes $930 million in bonds to help pay the state's pension obligations, employing a strategy similar to one lawmakers built into the current budget. A judge struck down that approach last fall, although the Schwarzenegger administration has said the latest bond proposal is different enough from the one rejected by the courts to make it legal.

His plan also relies on proposed cuts in Medi-Cal provider rates, currently facing a legal challenge, and $500 million that the governor expects to collect as a result of tribal gambling negotiations.

Democratic leaders have backed away from their longtime insistence that tax increases must be part of the budget solution, saying the gubernatorial recall election and Tuesday's election results prove that voters dislike tax increases.

But they also have signaled their displeasure with some of Schwarzenegger's proposed cuts to health care services and programs for the poor and disabled.

Meanwhile, Schwarzenegger and lawmakers also must begin to grapple with the long-term effects of their budget choices.

Legislative Analyst Elizabeth Hill has said the Schwarzenegger budget nearly balances next year. But she said the state will have an additional $7 billion budget hole in the 2005-06 fiscal year and "large operating shortfalls" for the next half-decade unless lawmakers enact permanent program cuts or tax hikes.