California Lawmakers Strike Deal With Brown on Budget

California Governor Jerry Brown and legislative leaders said they have reached agreement on a budget for the most populous U.S. state.

Lawmakers plan to vote June 15 on the spending plan, whose total size wasn’t announced. Brown proposed a record $107.8 billion for core operations in the year beginning July 1, saying he wanted to use as ballooning surplus to pay down debt and build reserves. His fellow Democrats, who control the legislature, wrestled some added spending from him for health and welfare programs.

California has benefited from a surge in revenue, much of it from capital-gains taxes and $7 billion in temporary income-and sales-tax increases. The state has gone from a $25 billion deficit three years ago to a record surplus. Brown has argued that the extra money is fleeting and should be used to cushion future economic declines.

“The leaders of the legislature have worked very hard to build a solid and sustainable budget that pays down debt, brings stability to the teachers’ pension system and builds at long last a reliable rainy day fund,” Brown, 76, said in a statement.

June 15 is the constitutional deadline to pass a spending plan. Lawmakers don’t get paid for each day they are late. The governor must sign a budget into law by July 1.

Revenue Assumptions

Democrats in the senate and assembly, who sought to justify additional spending by saying Brown’s revenue assumptions were too conservative, reached agreement with the governor on so-called triggers that boost expenditures if taxes exceed estimates later in the year.

He also agreed to use a smaller estimate of what it will cost to add more people to the state’s health insurance program and to slow his plan to retire what he calls a “wall of debt” accrued to balance previous budgets. Brown wanted to fully repay money owed to schools in the coming year. Instead, those loans will be repaid over two years.

The budget includes elements of Brown’s plan to prop up the $74 billion unfunded liability of the California State Teachers’ Retirement System, the second biggest pension in the nation. Schools, collecting money from the tax increase Brown won, will see their responsibility for teacher pensions double within seven years, while teachers and the state will also pay more.

The budget counts on voters in November to amend the constitution to require the state to set aside 1.5 percent of general-fund revenue each year, as well as capital-gains taxes that exceed 8 percent of the general fund.

Credit-rating companies have criticized California for its failure to set aside money when the economy is booming and for relying too much on volatile capital gains to pay for general-fund spending.

Bond Rating

California’s general-obligation bonds have an A1 rating from Moody’s Investors Service, the fifth-highest rank. Standard & Poor’s grades them one step lower, at A, with a positive outlook -- a potential precursor to an upgrade. California hasn’t had an S&P rating above A since 2009. Only Illinois has a lower rating from both Moody’s and S&P.

The spending plan includes $250 million earned from the auction of greenhouse gas emission credits to finance operations of the state’s proposed high-speed rail line connecting San Francisco and Los Angeles. The project will get 25 percent of the auction revenue in future years, less than the 33 percent Brown had proposed.

The money is needed to prop up the project while lawsuits prevent the state from selling bonds to begin construction of the $68 billion project.

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

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Pete Young, Mark Schoifet

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