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Brown’s Election-Year Surplus Aims at California Voters

California Governor Jerry Brown, offering an election-year budget stuffed with the biggest surplus in more than a decade, has a simple message for his fellow Democrats who control the Legislature.

“A lot of Democrats want it to be Christmas,” said Jack Pitney, a professor of government at Claremont McKenna College in Claremont, California. “And Jerry Brown is telling them it’s still Lent.”

The 75-year-old Brown proposes to boost general-fund spending 8.5 percent to $106.8 billion, the largest in state history. He’d pay down $11 billion lawmakers borrowed for previous deficits and set aside a $1.6 billion reserve, while spending more for schools, welfare and health care for the poor.

Brown, who piloted the world’s 10th largest economy from a $26 billion deficit, may seek a fourth term this year and has already amassed a campaign war chest of $15 million. He needs to satisfy Democratic constituencies that want to restore social programs cut during the recession, while at the same time showing voters he’s prudent with their money.

“This kind of budget is going to make it very difficult for the Republican nominee to portray him as Governor Moonbeam,” Pitney said, referring to Brown’s nickname during his first two terms, from 1975 to 1983. “He’s coming across as Governor Goodwrench.”

Good Fortune

Brown is riding a wave of good fortune and a surging economy. State revenue for December was $2.3 billion ahead of estimates, or 28 percent, Controller John Chiang said yesterday.

California’s fiscal health has improved with higher income-and sales-tax levies he persuaded voters to approve in 2012, better-than-projected capital-gains receipts and spending curbs the governor maintained last year. The governor said he would stockpile excess capital gains tax revenue, protected by constitutional amendment, to better weather future downturns.

Capital gains from the performance of the stock market have long been criticized by credit rating companies for their unpredictability. Brown could have pushed either to restructure California’s taxation system to minimize volatility, or to build up a fund reserve, Standard & Poor’s analyst Gabriel Petek said by telephone.

“Brown went with the approach that has better political viability,” Petek said. Either one is a credit positive for California, he said.

The most populous U.S. state has seen a sharp turnaround from the past decade, when it was seen as ungovernable, facing budget gaps that exceeded $100 billion combined, and was forced to issue IOUs to pay bills.

Good News

“This year the news is very good, but by no means are we out of the wilderness yet,” Brown said yesterday at a briefing. “We must be very prudent in how we spend public funds.”

His budget projects that the state will have $6 billion of additional revenue in the fiscal year that begins July 1. It calls for spending 9 percent more on schools and 10.5 percent more on public universities. Health and human services will get an additional $460 million.

The governor said he would push for a constitutional amendment similar to one proposed by Assembly Speaker John Perez, a Los Angeles Democrat, that would require the state to funnel surplus revenue from unpredictable capital-gains taxes into a reserve fund to avert cuts when the economy sags.

Excess Funds

It would to set aside excess funds when revenue from capital gains exceeds 6.5 percent of projections. Once the reserve tops 10 percent of general-fund spending, which pays for most basic services, the excess could go to one-time needs.

The proposal would replace one already on the ballot. That plan, favored by Republicans and opposed by public-employee unions, would fill the reserve whenever all tax revenue exceeds 3 percent of general-fund spending. Democrats can alter the ballot measure using their two-thirds majority.

Brown also said he’ll deal with looming shortfalls in public pensions. The governor estimates that the state owes as much as $217 billion in public-employee pension and health care costs.

That includes an $80 billion gap facing the California State Teachers’ Retirement System that, unless fixed, will leave the fund broke within 30 years. While the governor’s budget dedicates none of the current surplus toward that debt, Brown said he intends to work with lawmakers this year to come up with a plan to pay down some of that liability.

Such policies are likely to help him with voters concerned about the state’s long-term fiscal health. Brown’s approval rating was 55 percent in a University of Southern California/Los Angeles Times poll released Nov. 11, his highest since returning to the governor’s office in after first holding it more than 30 years earlier.

Prison Construction

Brown proposes spending $500 million to build more prisons and local jails, and said he’d ask a panel of federal judges to grant a two-year extension to their deadline for California to reduce its inmate overcrowding.

The governor said he intends to pay off early the remaining $1.6 billion from the $15 billion of deficit bonds former Governor Arnold Schwarzenegger championed after voters ousted Democrat Gray Davis over his handling of state finances.

Brown proposed using $250 million from state-sold carbon allowance auction proceeds, required by law to be spent on greenhouse gas emissions-cutting efforts, to help jump-start construction of a high-speed rail line linking San Francisco and Los Angeles. He borrowed $500 million from the auction proceeds last year and plans to repay a fifth of that this coming year.

Veto Override

Democrats, who holds two-thirds of the seats in both chambers of the Legislature and can override a Brown veto, have their eyes on new programs. Senate President Pro Tem Darrell Steinberg of Sacramento, for instance, wants to expand transitional kindergarten to children as young as 4 years old, at a cost of almost $1 billion annually by 2020. That’s not included in Brown’s proposal.

The state’s fiscal turnaround led Standard & Poor’s last January to raise California’s credit rating to A, its sixth-highest level. It was the first time it lifted the state since 2006. Fitch Ratings followed in August with a boost to A, the state’s highest score from Fitch since 2009.

Investors demanded as little as 0.3 percentage point of extra yield to buy California debt instead of benchmark munis in October, the least since 2008, data compiled by Bloomberg show. The state’s bonds beat the $3.7 trillion local-debt market for a fourth straight year, the longest streak since 1999, S&P data show. While the whole market has lost 2.6 percent last year, California debt was down 1.8 percent.

Eric Friedland, head of municipal credit research for Schroder Investment Management North America, praised Brown’s plan to set aside a rainy-day fund.

“The governor and his staff have recognized that revenue growth is fleeting,” Friedland said by telephone. “In the past, governors have used revenue growth to fund new programs on the assumption that revenue growth was going to continue.”

To contact Bloomberg News staff for 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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