Brown Reserve Would Restrain Spending Power, Analyst Says

Proposals to create a new California budget reserve would restrict lawmakers’ control of state spending, altering the balance of power between legislators and the governor, the nonpartisan Legislative Analyst’s Office said.

Two plans, including one backed by Governor Jerry Brown, would set aside funds when times are good to reduce boom-and-bust fluctuations and improve predictability.

“The power of the purse is perhaps the preeminent power of California’s Legislature,” the nonpartisan fiscal agency said yesterday in a report. “By requiring money to be taken off the table in strong revenue years, both measures aim to constrict the ability of the Legislature to spend state tax revenues in certain circumstances.”

The most populous U.S. state is projecting the biggest budget surplus in more than a decade after tax increases approved by voters. Brown called a special session of the legislature to propose putting highly variable capital gains revenue into a rainy-day fund and using surpluses to pay down budget and bond debt.

Brown’s plan would replace a proposal headed to voters in November that would fill the reserve whenever total tax revenue exceeds 3 percent of general-fund spending, in effect putting a cap on the budget. That proposal would devote excess revenue above historic trends to reserves and limit when the reserve can be spent.

California’s credit rating, ranked second-lowest in the U.S. by Standard & Poor’s, is poised to benefit from a budget reserve.

Ballot Measure

The western state depends on personal income taxes, including highly variable capital gains revenue, for about two-thirds of its general spending.

The current ballot measure is favored by Republicans and opposed by public-employee unions. Brown’s plan would require passage by two-thirds of the legislature. Democrats had such a so-called supermajority until three senators were suspended after being charged in unrelated corruption cases.

Investors in California debt demand 34 basis points more for 10-year bonds than top-rated securities, according to data compiled by Bloomberg. That’s down from 54 basis points on Jan. 9. A basis point is 0.01 percentage point.

Brown has proposed a record $106.8 billion budget for the fiscal year that begins July 1. He called for an 8.5 percent increase from current spending, with $11 billion to pay off loans that papered-over previous deficits, and $1.6 billion in reserves, while increasing funds for schools, welfare and health care for the poor.

To contact the reporter on this story: Pete Young in San Francisco at pyoung13@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Jeffrey Taylor, Michael Shepard

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