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UCLA Forecast: Things Not So Bright in Golden State

LOS ANGELES — California cities’ bonds took a beating during a UCLA Anderson Forecast presentation Tuesday.

The brunt of the economic forecast presentation took aim at California state and local government fiscal policies and the resultant impact on their credits.

Even the passage of Proposition 30, hailed “as the beginning of the end of budget stress,” came under fire in a report by UCLA Anderson Forecast senior economist Jerry Nickelsburg, who called it a drag on the state economy.

Proposition 30 — which raises sales tax by 0.25% for four years and increases income tax on high earners — provides some breathing room, but could also have the affect of slowing job growth in the private sector by shifting money to the public sector, according to Nickelsburg.

“It increases volatility by increasing the state’s reliance on high earners to fund state government,” the economist said. “If we have a downturn while this is in effect things will be worse than they were before it was enacted.”

Nickelsburg called the measure a double-edged sword because it gives the state a way forward in funding state investment for education, but it does not address the way the state funds government for the long run.

According to California Controller John Chiang, a panelist at the presentation, for Proposition 30 to get California on the right path, it needs to come up with a better tax and finance structure.

Proposition 30 puts money back into education, which Chiang said has been bearing the burden of the downturn.

After that, the state needs to fund essential infrastructure projects, but the rest of the money should go to pay down debt, Chiang said.

Fiscal reform also needs to occur at the local level, because without reform, bankruptcy and default are likely among the lower rated cities in Los Angeles County, said William Yu, a UCLA Anderson Forecast economist.

Public safety, which includes police and firefighters, tend to comprise a large chunk of city budgets – and California surpasses other states in salaries paid to those workers, Yu said.

At an average salary of $68,160, California’s firefighters earn 50% more than the national median. The state’s police officers, paid $79,030 on average, earn 46% more than the national median. 

On average, cities spend 61% of their tax revenue on police officers and firefighters.

Problems with the state’s weaker credits can also bleed on to stronger credits.

San Bernardino County and San Bernardino Community College District, both highly-rated, are currently trading at a discount because the city is in bankruptcy, said panelist Sean Kraus, a vice president in the Los Angeles office of Credit Suisse Securities USA LLC.

County officials had to reassure bondholders after the city declared bankruptcy, said panelist Greg Devereaux, San Bernardino County’s chief executive officer. “Some of the media reports coming out were even saying the county, not the city was in bankruptcy,” he said.

San Bernardino County had triple-A ratings from the three largest rating agencies as of March.

Panelist Eric Hoffmann, who heads Moody’s Investors Service California local government rating team, said that California cities are not on the right track.

“Moody’s is not the Good Housekeeping seal of approval for cities, we rate cities based on the likelihood that they will default on their securities,” Hoffman said. “Of the 92 California cities we rate, we have roughly one-third on watch for downgrade.”

Hoffmann said what concerns him is that many municipalities, including the 17 counties also on watch for downgrade, have expenditure growth that exceeds revenue growth.

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