Brown With Surplus Proclaims California’s Crisis Is Over

Governor Jerry Brown declared an end to California’s chronic fiscal crisis, projecting the first surplus in a decade thanks to spending cuts and $6 billion in new taxes approved by voters in the most populous U.S. state.

Brown’s budget predicts an $851 million surplus for the fiscal year that begins July 1. The blueprint, including a $1 billion reserve, increases general-fund spending by 5 percent to $97.6 billion. Schools will get an additional $2.7 billion.

The 74-year-old Democrat won office in 2010 on a pledge to repair the crippled finances that plagued the world’s ninth- biggest economy for the past 12 years with $213 billion in combined deficits as political infighting prevented permanent fixes.

California today is poised to achieve something that has eluded us for more than a decade -- a budget that lives within its means, now and for many years to come,” Brown said yesterday in a letter introducing his plan to lawmakers.

The general-fund budget, paying for most basic services, would be the largest since 2008, when Governor Arnold Schwarzenegger, a Republican, and lawmakers spent $103 billion. Brown is calling for total spending of $145.8 billion, including special funds and bond proceeds, the most ever for California and an 11 percent increase since his term began.

In addition to funding for public schools and community colleges, universities will get an extra $250 million. Courts will see their support cut by $200 million, while $350 million is earmarked to pay for requirements under President Barack Obama’s health-care law.

Growing Surplus

The governor estimates the state surplus will shrink to $47 million in 2015 before rising to as much as $994 million by 2017. When he took office, Brown faced a $25 billion deficit with projected shortfalls of more than $18 billion a year through 2015.

That changed when Californians in November granted Brown the highest statewide sales tax in the U.S., at 7.5 percent, and boosted levies on income starting at $250,000 -- reaching 13.3 percent on those making $1 million or more, the most of any state.

Under his plan, by 2017 the state would repay all but $4.3 billion of $35 billion of internal borrowing through transfers between state accounts, which he calls the “wall of debt,” accumulated in the last decade to fill previous shortfalls absent permanent fixes.

‘Fiscal Mess’

“I’m determined to avoid the fiscal mess that the last few governors had to deal with,” Brown said. “The way you avoid it is by holding the line, by exercising a common sense approach to how we spend our money.”

Brown has $500 million extra to spend from a successful voter initiative pushed by hedge-fund executive Thomas Steyer that stripped out-of-state corporations of an option for lowering their state income taxes. It’s projected to raise about $1 billion annually, with half set aside for the state’s general fund and half for energy-efficiency programs.

Brown warned that the surplus could be at risk from federal deficit actions, a delay in the economic recovery or increasing health-care costs.

Brown’s budget estimate differs from those made in November by the state’s independent Legislative Analyst’s Office, which projected a $1.9 billion deficit in the coming fiscal year even with the new taxes, and a surplus by 2015.

The governor’s plan assumes the state will receive more revenue from the elimination of redevelopment agencies than the analyst’s office projected. Brown also estimated that he doesn’t need to repay some internal borrowing from special funds in the coming fiscal year that the analyst’s office had assumed would be required.

Math ‘Off’

Republicans, with too few votes to block or amend legislation backed by Democrats, were skeptical of Brown’s numbers.

“Their math has always been off,” said Senate Republican Minority Leader Bob Huff. “This is a little overly optimistic on the part of the governor’s office. I believe the deficit will re-emerge. The governor may have declared it over, but until we get people back to work and we can sustain that, we are still going to see deficits.”

A surplus might have broad implications for the state’s lagging credit rating, and thus its cost of borrowing.

Standard & Poor’s, which last upgraded California in 2006, revised its outlook to positive in February. The rating company said it would boost the level within two years if Brown resolved the budget gaps. S&P grades the state A-, six steps below AAA and the lowest in the U.S.

The extra yield investors demand for owning California state and local bonds was 75 basis points yesterday, according to data compiled by Bloomberg. The difference had declined to 53 basis points in November, the lowest in four years.

Credit Improving

“The market has recognized that the credit quality of California has been improving,” Michael E. Johnson, managing partner at Gurtin Fixed Income Management LLC in Solana Beach, California, which manages $4 billion in municipal debt, said yesterday in a telephone call. “Seeing headlines like this may make investors more willing to buy California paper, which may compress the spreads a bit.”

The state’s finances were helped by a decision California lawmakers made in 2009 to eliminate automatic inflation adjustments that were built into most state programs.

With the budget crisis behind him, Brown said he wants to overhaul education funding by changing formulas used to calculate how much each school gets. The governor said his goal is to see that low-income districts receive more, to improve the education of impoverished students learning English.

School Mandates

Brown’s proposal would grant districts greater control over how money is spent by eliminating many mandates, such as one that requires schools to reduce class sizes.

He will revise his proposed budget for fiscal 2014 in May with the latest revenue and spending estimates. Lawmakers have until June 15 to pass a spending plan, or lose their pay until they do.

The budget can be approved on a simple majority vote, thanks to a 2010 initiative that lowered the requirement from two-thirds. Any attempt to raise taxes needs approval by a supermajority, a power Democrats will enjoy for parts of this calendar year.

“We’ve been through the hardest of hard times,” said Senator Darrell Steinberg, a Democrat from Sacramento. “Governor Brown is right when he says fiscal discipline is not the enemy of democratic governance. But I would add a little addendum to that, which is that fiscal discipline is not the enemy of governance by California Democrats.”

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

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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