California’s Brown Focuses on Trump, Dark Clouds as State Booms

  • Market reversal, Obamacare repeal could weigh on state budget
  • State bond rating increased as debt paid off, savings boosted

California is enjoying its highest credit rating since the turn of the century, thanks to a record-setting stock rally, a resurgent real estate market and a Silicon Valley boom that’s left the government reaping budget surpluses.

Yet Governor Jerry Brown’s next spending plan is likely to be more focused on the risk of a market reversal that could cut income taxes from the highest earners, slower revenue growth, and Donald Trump’s promise to repeal President Barack Obama’s health-care law, which could shut off federal aid.

“Taken together, that augurs for a prudent fiscal plan that doesn’t over-commit the state to a higher ongoing level of spending that can’t be sustained," said H.D. Palmer, a spokesman for Brown’s finance department, which will propose a budget Tuesday.

Brown, a Democrat who took office six years ago, has overseen a financial turnaround for the most-populous U.S. state that’s been lauded by Wall Street. After revenue rebounded, in part because of tax increases, the governor used some of the windfall to pay off debt and add to the savings account that can be tapped the next time the economy stumbles.

California’s revenue is volatile because it draws a large share of taxes from wealthy residents whose incomes are tied closely to the stock market, which saddled the state with huge budget deficits after the Internet and real estate bubbles burst. The top 1 percent of earners accounted for nearly half of the state’s personal income-tax collections in 2014. Voters in November approved a 12-year extension of higher tax rates on the rich, deepening the reliance on their fortunes.

"There is some volatility and some risk that they have that other states don’t," said Eric Friedland, director of municipal research in Jersey City, New Jersey, for Lord Abbett, which manages $20 billion of municipal debt. "In periods of economic growth, they’re going to outperform. In periods of recession, they’re going to underperform. Their ability to mitigate those swings is going to be manifested through their budgeting practices."

That caution may be reinforced by the state’s revenue so far this year. Preliminary income-tax collections are $930 million less than projected for the fiscal year that began in July, according to the nonpartisan Legislative Analyst’s Office. The analysts called the status of revenue "murky" until at least April, because it’s unclear if residents are modifying their payments in anticipation of tax cuts after Trump takes office.

Also uncertain is the fate of Medicaid, which California expanded as part of the Affordable Care Act, Obama’s health-care law. A repeal would cost the state at least $15 billion in federal funds, according to the California Budget and Policy Center, a nonprofit organization focused on how decisions affect low and middle-income Californians.

In the current $122 billion general-fund budget, which increased spending by 6 percent, Brown and legislators also boosted the rainy-day fund to $6.7 billion, about $2 billion over what was constitutionally required.

"They need to be more conservative than other states have to be," Friedland said.

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