SAN FRANCISCO — As California grapples with an estimated $16 billion budget gap, analysts warned lawmakers this week to shun one-time gimmicks to try fix the shortfall.
Moody’s Investors Service, Standard & Poor’s and Fitch Ratings weighed in with concerns following the Monday release of Gov. Jerry Brown’s $91.4 billion May Revise budget proposal.
Those concerns jeopardize one celebrated success of the governor’s budget work so far — Standard & Poor’s revision of its outlook on California’s A-minus to positive from stable.
“If lawmakers are unable to agree upon solutions to the state’s budget deficit that we view as credible, we may revise the outlook back to stable,” S&P analyst Gabriel Petek said in a note Tuesday.
“Furthermore, we could change the outlook to negative or lower the rating if we believe the state’s credit quality weakens through the budget process.”
Moody’s and Fitch rate California A1 and A-minus, respectively, with a stable outlook.
In the May Revise, Brown’s projected a budget gap of $15.7 billion for the next fiscal year.
The governor’s proposed remedies for the deficit include cuts of $8.3 billion to education, Medicaid and social services, along with $5.9 billion in higher revenues, partly from a proposed temporary tax-rate hike and tax revenue expected from Facebook Inc.’s upcoming initial public offering.
But Brown’s proposal is just the start of the process.
“What the Legislature will end up passing is still unclear,” Moody’s analyst Emily Raimes said in an email Wednesday. “We will be assessing whether the budget that is passed sticks to being fairly close to structural balance, or reverts to using a significant amount of one-time measures.”
The Democratic governor’s plan also includes a $1 billion reserve, which some lawmakers have targeted to reduce the amount of program cuts.
Petek said going without a reserve would be a bad idea, and that despite its small size, the reserve is still important because the Facebook tax windfall the government is projecting to help with the budget is especially difficult to forecast.
Brown has estimated that the Facebook IPO slated for Friday will bring in $1.48 billion, which doesn’t factor in the tax increases on high earners he is asking voters to adopt in November.
He estimates the tax measure would raise $8.5 billion over the next fiscal year. It would temporarily increase the state’s sales tax by one-quarter of a cent to 7.5% and taxes on income starting at $250,000, as well as raise taxes on those making more than $1 million to 13.3% from 10.3%.
The governor’s tax initiative also faces competition that could make it harder to pass. Molly Munger, an attorney and daughter of Berkshire Hathaway Inc.’s vice chairman, Charles Munger, has proposed a rival tax initiative to help fund public schools.
If voters reject the tax initiative, the governor’s budget proposes cutting $6.1 billion with the majority coming out education spending.
Even if the state is able to close the gap without swaying too far from structural changes, it will not end the uncertainty.
“We believe that the state of California has the ability to address the expanded budget gap, although rebalancing the state’s finances and cash flows through fiscal 2013 will not end the state’s fiscal uncertainty,” Fitch analyst Doug Offerman said in a note Tuesday. “Under any scenario, the state will still have to deal with the billions in budgetary borrowing remaining from the last two fiscal crises.”
Brown has called that budgetary borrowing the “wall of debt,” much of it a result of one-time fixes used to try to fill past gaps.
Offerman said he expects little traction from lawmakers on the budget until after the June 5 primary elections.
Last year, the governor signed the first on-time budget in five years on the last day of the fiscal year.
