California’s Budget Surplus Leads to Credit Upgrade

Popular Economics Weekly

A day after voters passed Proposition 2, which creates a “rainy day fund” to cushion the state budget from future economic downturns, major credit-rating house Standard & Poor’s on Wednesday upgraded California’s general obligation bond rating. S&P raised the state’s credit rating from A to A-plus, citing the stability offered by Proposition 2.

But it’s more than that. California’s unemployment rate dropped to 6.8 percent in September, according to the State Unemployment Office and the U.S. Bureau of Labor Statistics. The San Francisco Bay area led the way with San Francisco and the surrounding counties’ jobless rates in the low 4 percent, which in essence means full employment.

Proposition 2, championed by Gov. Jerry Brown and passed by the Legislature on a bipartisan vote, requires the state to set aside funds, especially when revenue from taxes on capital gains is high, to both pay down debt and create a reserve that can be tapped only when the state is in fiscal distress.

What happened to the California economy that several years ago was pronounced dead or dying by its critics, conservatives determined to downsize government with budget and tax cuts to punish everyone, except the wealthiest? Governor Jerry Brown did just the opposite—raised more revenues to stimulate job growth, at a time of record low interest rates, as the S&P upgrade noted.

Californians won the battle of economic ideologies that has blocked so much growth in the rest of the country; such as with Kansas, the poster child for cutting government programs that has set its economy in reverse.

“The upgrades follow voter approval on Nov. 4, 2014, of a strengthened budget stabilization account under Proposition 2,” S&P analyst David Hitchcock said in a statement. “In our view, the new state constitutional provision will partially mitigate California's volatile revenue structure by setting aside windfall revenue for use during periods when state tax revenue could fall materially short of forecast.”

And California now has a very large budget surplus, because of it. State Controller John Chiang in a press release just released his monthly cash report for the month of June, and announced that the state's General Fund -- the primary account from which California funds its day-to-day operations and programs -- ended the fiscal year with a positive cash balance for the first time since June 30, 2007.

A positive cash balance means that the state had funds available to meet all of its payment obligations without needing to borrow from Wall Street or the $23.8 billion available in its more than 700 internal special funds and accounts.

And what about California’s drought could badly hurt future growth? Voters also overwhelming approved Proposition 1 was to address water conservation and climate change problems that could create even more severe water shortages in the future.

"At its core, Proposition 1 advances an all-of-the-above strategy that includes everything from local resources to water storage to safe drinking water," said Timothy Quinn, executive director of the statewide Association of California Water Agencies. "Other states facing similar challenges may learn from that approach."

And that is the point. California, once thought the economic basket case, has instead become the model that both red and blue states should follow.

Harlan Green © 2014

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