Wall Street cheers Brown’s revised May budget

Wall Street cheers Brown’s revised May budget

(Calif.) A key Wall Street rating agency gave California a positive credit report last week, paving the way for a likely credit upgrade of the state’s debt in the near future.

Standard and Poor’s Rating Services said that Gov. Jerry Brown’s revised May budget avoids using windfall revenues from capital gains for ongoing programs.

 “Under the governor’s plan, the state would pay down most of a large funding obligation owed to its schools, continue to retire what remains of its budgetary debts, and make significant deposits to its reserve funds,” said S&P credit analyst Gabriel Petek, the lead author of the report, said in a statement.

He added that if most of what the governor has proposed gets adopted, “the state’s credit quality could be consistent with a higher rating.”

S&P last upgraded the state to “A+” in November of 2014; a one-notch upgrade would take the state up to “AA-“

Brown’s May revision, among other things, increases spending for K-12 schools and community colleges by $6 billion and increases per pupil spending by more than $3,000 in 2015-16 over 2011-12 levels.

Billions of dollars have already been pumped back into California schools as the economy has continued to recover from the recession. The S&P report noted that because the state did not fund schools with the minimum amount dictated by Proposition 98 between 2008 and 2012, the amount owed to schools to make up those cuts has grown to $10.6 billion.

Under Proposition 111, if the state spends less than the minimum amount on schools during difficult economic periods, it must make up the difference – called the maintenance factor – from those cuts once general fund revenue growth exceeds per capita income growth.

“Sometimes this tradeoff gets overlooked by policy advocates and members of the legislature when, amid economic expansion, Propositions 98 and 111 require that a large majority of any new funds generated by accelerating revenue growth automatically flow to education,” authors said.

According to the report, of the state’s $5.6 billion in additional revenue, 40 percent goes to education due to Proposition 98, while an additional 50 percent or more is required by Proposition 111.

This means that schools would be poised to receive nearly $5.5 billion.

Authors of the report draw a comparison between this most recent budget projection and that of 2006, in which the Department of Finance estimated a $4.5 billion operating deficit for 2008 despite an increase of $6.6 billion in revenue.

This year, with a similar total increase of $6.7 billion in revenue, the Department of Finance is projecting that the general fund budget could remain balanced through 2018.

The difference, according to authors, is that in 2006, the state’s “underlying fiscal structure remained out of alignment,” and that current policies have helped to align it.

“As a result of California's demonstrated commitment to paying down billions of dollars in budget debt and depositing significant sums into its rainy day reserves, the Golden State's credit score is on the verge of another upgrade," John Chiang, California state treasurer said in a statement regarding Standard and Poor’s findings"If we can avoid the spending temptations that come with swelling state coffers and remain fiscally-disciplined, not only will taxpayers pay less to build schools and roads, but we'll be better positioned to withstand the next economic downturn."

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