Brown California Budget May Be Credit ‘Crossroad,’ S&P Says

California Governor Jerry Brown’s plan to pay down years of accumulated loans used to paper over past deficits may represent a “crossroad” for the state’s credit rating, the lowest in the U.S., Standard & Poor’s said.

The governor’s latest budget revision includes plans to repay $29 billion of an estimated $35 billion in deficit debt and loans by 2015. That’s twice as much as estimated in the current year budget. He said the state’s persistent deficit had declined to $9.6 billion from $15 billion because of better- than-expected income tax revenue.

Brown, a 73-year-old Democrat, took office in January on a pledge to fix the fiscal crisis that has left California with the lowest credit rating of any state from S&P. The governor this week revised his budget proposal for the fiscal year that begins July 1, saying the state’s improving economy would drive tax revenue $6.6 billion higher than forecast through June 2012.

“In the context of a modestly paced economic recovery and the possibility of serious strain on state cash flow that could occur early in fiscal 2012, we believe the terms of the final revised budget could represent an important crossroad for the state’s rating,” a Standard & Poor’s analyst, Gabriel Petek, said in a report today.

Voters Decide

Brown’s budget calls for lawmakers to extend $9.1 billion of expiring taxes and fees, and then asking voters to validate that decision later. It doesn’t spell out how the state would erase what is left of the deficit if voters reject the taxes.

The plan involves “much uncertainty” because of Brown’s insistence that the tax and fee extensions go before voters, the state Legislative Analyst’s Office, a nonpartisan body, said in a report said today.

Mac Taylor, the state legislative analyst, said Brown’s budget relies too heavily on passing tax extensions of a 0.25 percentage-point increase in personal income-tax rates, a 1 percentage-point boost in the retail-sales levy and a 0.5 percentage point increase in auto registration fees.

The election is “a big unknown,” Taylor said at a Sacramento news conference.

Brown has said that if the taxes aren’t renewed, he’d have to deal with the budget deficit through cuts alone. He said this week that California won’t need to extend the increase in personal income-tax rates until next year because of the better- than-expected revenue, Brown said.

Other Options

Taylor said there are other scenarios, including a mix of smaller budget reductions and scaled-back tax increases.

“You do have a lot of options in how you look at revenue proposals,” he said.

The state won’t be able to issue short-term notes for cash flow in July or August with that vote pending unless Brown and lawmakers agree on spending cuts that would be activated if voters turn down the tax plan, Treasurer Bill Lockyer has said.

The rating company also said the improved revenue may make Brown’s efforts to win support for those taxes more difficult. Republican lawmakers, whose votes will be needed to obtain a two-thirds vote required on the measure, oppose the plan.

“We believe the stronger revenue trends may also have undercut, to a degree, the political urgency to extend the temporary tax increases from our perspective,” Petek said. “In recent weeks, political opposition to the governor’s tax proposal appears to have coalesced around the idea that extending the temporary tax increases was less necessary because tax collections were exceeding those assumed in the January budget proposal.”

To contact the reporter on this story: Michael Marois in Sacramento at mmarois@bloomberg.net

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

Enlarge image

California Governor Jerry Brown

Justin Sullivan/Getty Images

California Governor Jerry Brown speaks to reporters as he announces his proposed budget at the California State Capitol on January 10, 2011, in Sacramento, California.

California Governor Jerry Brown speaks to reporters as he announces his proposed budget at the California State Capitol on January 10, 2011, in Sacramento, California. Photographer: Justin Sullivan/Getty Images