Increased Revenues Enable California to Pay Down Debt

Governor's proposed budget ups general-fund spending by 7 percent, but also increases pension contributions and creates "rainy-day" fund.

California Governor Jerry Brown, buoyed by surging revenue from higher taxes and a recovering economy, boosted his proposed budget for the most populous U.S. state to $107.8 billion for the fiscal year that begins in July.

The plan would also begin erasing the $73.7 billion unfunded liability of the California State Teachers’ Retirement System, the second-biggest U.S. pension, by increasing annual contributions by the state, teachers, and school districts.

“This is good news for California,” said Brown, a 76- year-old Democrat. “This budget allows us to pay down our debt.”

The 7 percent increase from the current $100.7 billion in general-fund spending, which pays for most core operations of state government, comes as Brown seeks an unprecedented fourth term. In his 2010 campaign, Brown promised to mend state finances that had become so dysfunctional that California sank to the bottom of state credit ratings and had to issue IOUs to cover expenses.

California’s total budget, including federal money and bond funds, would increase to $156.2 billion under the proposal. It puts $1.6 billion into a rainy-day fund and pays off half of the remaining budget debt former governors racked up to fill deficits in the last decade.

 

Surging Revenue

Brown has benefited from a $2.4 billion surge in revenue, must of it from capital-gains taxes, that has helped the state go from a $25 billion deficit three years ago to a record surplus. Most of the revenue increase is consumed by higher costs for health care, schools, and drought relief.

The governor must now wrangle with the Democrat-controlled Legislature, where members of his party are pushing to boost spending on an array of programs cut during the recession.

“We faced a $60 billion deficit three years ago,” said Assembly Speaker Toni Atkins, a Democrat from San Diego. “This year we look forward to a surplus. But at the same time that we are being responsible, that we are establishing reserves and paying down our debt, we have to realize that there are some services and programs that we need to reinvest in. We need to reinvest in our human capital.”

Brown persuaded voters to temporarily raise sales and income taxes in 2012, restrained lawmakers from spending the extra money, and struck a political deal to set up a rainy-day fund to cushion against economic downturns and help boost the state’s credit.

“The rainy-day fund is a great proposal—it’s something that California needs,” Ron Schwartz, who helps manage $1.8 billion of munis at Orlando, Florida-based Ridgeworth Capital Management, said in an interview. “It will help them on the credit rating and so it’s great to see some responsible steps being taken.”

Still, California has the fourth-highest state unemployment rate, according to the Bureau of Labor Statistics, and will lose another 2,000 jobs in suburban Los Angeles as Toyota Motor Corp. moves its U.S. headquarters to Texas. The state owes $340 billion in long-term debt such as unfunded pensions for teachers and health care costs for government retirees.

Under Brown’s plan for the teacher pension fund, school districts would see their annual contribution more than double, to 19.1 percent of payroll from 8.25 percent, phased in over seven years. Teachers would pay 10.25 percent instead of the current 8 percent, while the state would boost its contribution to 6.3 percent from 3 percent.

The contribution changes would bring an additional $450 million to the fund in the coming fiscal year, rising to $5 billion more a year by 2021.

 

Spreads Tighten

The penalty investors demand of California bonds has declined 45 percent in the last year, according to data compiled by Bloomberg. California investors get 31 basis points, or 0.31 percentage point, more than top-rated debt for 10-year securities. That’s down from 56 basis points on June 25.

Voters in California next month will head to the polls in a so-called open primary in which the top two vote-getters, regardless of party, advance to the general election in November. Brown, already the longest-serving governor in California history, leads his nearest Republican rival by 40 points in polls.

The governor is required by law to update his proposal with the latest tax collection figures before it’s considered by lawmakers next month.

“People seem to think that just because we have $2 billion in unanticipated revenue we are flush with resources,” said Senate Minority Leader Bob Huff, a Republican from Diamond Bar. “But when you have Medi-Cal and other programs that cost so much, we do not have a surplus of money. We have debt we need to take care of and I think the governor is wise in keeping a long-term view.”

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