Brown Says California Expects $6.6 Billion Revenue Gain, Trimming Deficit

California’s economy is “on the mend,” driving revenue $6.6 billion higher than forecast through fiscal 2012, reducing the deficit of the most populous U.S. state and trimming the need for higher taxes, Governor Jerry Brown said.

The deficit estimate shrank to $9.6 billion from about $15.4 billion, Brown said in revising his budget proposal for the year that begins July 1. In addition to balancing the books, Brown said his plan will increase education funding, take aim at “gimmickry” that boosted debt to $34.7 billion over the past decade, and limit borrowing to reduce debt costs.

“This is not the time to delay or evade, but to put our finances in order,” Brown said today in a Sacramento press conference.

The 73-year-old Democrat, who pledged to fix the fiscal malfunctions that left California with the lowest credit rating of any state from Standard & Poor’s, previously sought a five- year extension on $11 billion in expiring income taxes, sales taxes and fees. Republicans blocked a referendum on the levies.

“They seem to be putting up front in this budget document the future payment obligations and highlighting the extent to which the state has borrowed,” said Gabriel Petek, senior director of credit market services at Standard & Poor’s in San Francisco. “The governor’s approach seems to be more structurally oriented and that could be favorable for the state’s credit.”

Limiting Debt Issuance

Brown’s budget calls for limiting the amount of general- obligation borrowing by California, the largest U.S. issuer of municipal bonds.

The state may sell a total of $4 billion of general- obligation debt in the fall and spring, as well as $2 billion of lease-revenue bonds, the state budget director, Ana Matosantos, told reporters at a briefing.

The extra yield that buyers want for 10-year bonds from California issuers compared with top-rated municipal debt rose to 116 basis points on May 13, from a one-year low of 107 on April 15. A basis point is 0.01 percentage point.

“Budget proposals don’t really impress the marketplace very much at this point,” said Bud Byrnes, the chief executive officer of Encino, California-based RH Investment Corp., which trades about $100 million par value in bonds each month. “We’ll take it seriously when and if something gets passed. In the meantime, traders tend to have a very short time horizon.”

Tax Extensions

California won’t need to extend a 0.25 percentage-point increase in personal income-tax rates until next year because of the better-than-expected revenue, Brown said. He also rescinded plans to scrap blight-fighting enterprise zones.

Brown’s revised budget relies on keeping in place a 1 percentage-point boost in the retail-sales levy, to 8.25 percent, and a 0.5 percentage point increase in auto registration fees to 1.15 percent of a vehicle’s value. It also seeks to extend a reduction of the annual child tax credit to $99 from $309. All were put in place temporarily in 2009 and are to expire by July 1.

Brown’s initial plan in January asked lawmakers to put those tax extensions directly before voters in June. His revised budget calls for lawmakers to extend the taxes and then ask voters in November to validate the move. Spending would be based on the higher revenue with a provision that triggers cuts if voters don’t go along.

Jim Nielsen, the top Republican on the Assembly budget committee, said he doesn’t expect Republicans to agree to the tax extensions. Brown would need at least four Republican lawmakers to consent. The governor said he’s in discussions with between four and 10 Republican lawmakers.

‘Spigot of Spending’

“As far as our caucus is concerned, tax increases are not something that we would agree to,” Nielsen said at a news conference today. “Raising taxes only continues the spigot of spending.”

California’s constitution requires lawmakers to approve a budget by June 15 and for the governor to sign it into law by July 1. A new law approved by voters in November allows the budget to be passed by a simple majority vote and strips lawmakers of their pay whenever a budget is late.

To contact the reporters on this story: Michael Marois in Sacramento at mmarois@bloomberg.net; James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.