California Lawmakers Approve Record $156.4 Billion Budget

California lawmakers approved a record $156.4 billion budget for the most populous U.S. state after they struck a last-minute deal with Governor Jerry Brown over spending levels.

The plan passed by the Democratic-controlled senate and assembly yesterday boosts state outlays 5.8 percent in the fiscal year beginning July 1. The general fund, which pays for most core operations, will rise 9.6 percent to $108 billion.

California has benefited from a surge in revenue, much of it from capital-gains taxes and from $7 billion in temporary income- and sales-tax increases. The state, which in 2009 resorted to IOUs to pay bills, has gone from a $25 billion deficit three years ago to a record surplus.

“I was elected to lead the Senate when California was on the verge of bankruptcy,” said Darrell Steinberg, a Sacramento Democrat who became president pro tem in 2008. “Today, the budget is back in the black with a strong rainy-day fund, an aggressive debt repayment plan, a stabilizing pension system, and is projected to return surpluses for years to come.”

Brown, 76, who is seeking a fourth term, argued that the extra money is fleeting and should be used to cushion future economic declines. The budget counts on voters in November to amend the constitution and require that 1.5 percent of general-fund revenue be set aside each year in a rainy-day fund, as well as capital-gains taxes that exceed 8 percent of the general fund.

Credit Rating

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.

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 budget is about $1.2 billion more than Brown initially planned, after legislators wrestled added spending from him for health and welfare programs.

Democratic lawmakers sought to justify additional spending by saying Brown’s revenue assumptions were too conservative. They 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.

Pension Aid

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

Rail Project

The money is needed to support the effort while lawsuits prevent the state from selling bonds to begin construction on the $68 billion project.

June 15 was the constitutional deadline for legislators to pass a spending plan. The governor must sign a budget into law by July 1.

Investors demanded as little as 0.38 percentage point of extra yield last month to buy 10-year California obligations instead of top-rated municipal bonds, according to data compiled by Bloomberg. That’s almost half the level of a year earlier and down from a peak of about 1.7 percentage points in 2009, when the state resorted to IOUs to pay bills.

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, Theo Mullen

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