Brown Faces Pushback On California Budget

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PHOENIX- Lawmakers on both sides of the aisle are digging in for a struggle over California Gov. Jerry Brown's revised budget proposal, as both parties try to adjust priorities with California's fiscal outlook apparently dimming.

Brown released a revised fiscal 2017 state budget proposal May 13 that adds 5% from last year's spending, but is nonetheless lean on new initiatives at $169.3 billion.

The Democratic governor painted his approach as prudent in light of a revenue forecast that has been reduced by $1.9 billion due to poor April income tax receipts and more sluggish sales tax receipts than expected. The state had entered April with cash receipts slightly ahead of revenue projections made when the governor made his initial budget proposal in January.

In presenting his revised budget, Brown cited a Moody's Investors Service report that named California as being among the states least prepared for another recession.

Democrats in the legislature don't necessarily agree with what they see as Brown's unnecessary austerity.

Sen. Holly Mitchell, D-Los Angeles, said that Brown's proposal has its priorities wrong.

"I fully recognize our real-world responsibility is to manage moderate public funds prudently," Mitchell said in a statement. "Since the state's cash flow has slowed, let's focus on what the most urgent needs are and how to best spend our money to help those most in need."

She singled out Brown's January proposal to put what she said would be more than $3 billion into 'rainy day' beyond what is required, and another $1.5 billion in infrastructure renovations.

"Infrastructure and savings are meant to meet people's needs, not the other way around," she said.

Brown's budget revision, reflecting lower revenue projections, would set aside $1.3 billion less for the state's rainy day fund than his January proposal.

"As we face the prospect of state revenues that do not match expectations or live up to our hopes, it is important to bear in mind how much better California is doing than five years ago – and yet how many Californians are still waiting to feel the benefits of the improved economy," Mitchell said.

Mitchell applauded Brown's plan to issue bonds to finance mental health programs that aim to address California's growing homelessness problem among its mentally ill population. The program would spend about $267 million in bond proceeds in 2016-17.

"I appreciate the governor's call for fiscal prudence in his May Revision of the 2016-2017 budget," Sen. John Moorlach, R-Costa Mesa, said in a statement. "However, this fiscal restraint does little to address our state's unaddressed run-up of debt. If managing the budget is 'like riding a tiger,' looking out ahead ten years from now is like standing on the deck of the sinking Titanic."

Moorlach says the true state of California's finances is reflected in the unrestricted net position reported in its certified annual financial report, which went from a $116 billion deficit to $170 billion from the fiscal 2014 CAFR report to the FY 2015 CAFR.

"And that's before fully adding in the estimated $80.3 billion in retiree medical unfunded liabilities," he said. "When will California acknowledge it needs reform? The time has come for state leaders to establish a 10-year financial workout plan to get our fiscal house in order — one that establishes a common set of goals and a framework by which all legislative and executive actions can be measured. Only then can we truly leverage our state's resources to solve both our short and long term fiscal problems."

Assembly Democrats struck a more noncommittal tone.

"The governor's budget revision makes clear that the rainy day fund first proposed by Assembly Democrats is doing its job and absorbing the ups and downs of revenue forecasts," said Assembly Speaker Anthony Rendon, D-Paramount. "That means we are able to make necessary improvements to the budget without impacting existing services or using one-time money for ongoing programs. In the coming weeks, the Assembly will work to craft a responsible budget that protects reserves and reflects the values of the people of California: fighting poverty, improving early education, expanding access to higher education, and making progress to increase affordable housing."

Brown is getting support from a man who wants succeed him as governor: State Treasurer John Chiang, who announced this week he will seek the governor's office in 2018.

"The governor strikes a prudent balance between investing in California's future while girding the state for the next recession by calling for spending restraint," Chiang said. "If we want to keep IOUs, slash-and-burn program cuts, and shenanigan-laden budgets in our rear view mirror, California must continue to be disciplined in paying off its debts and living within its means."

Although the budget shows a $2 billion operating deficit in fiscal 2017, that includes the effect of funding the supplemental $2 billion deposit into the state's budget reserve, which leads S&P Global Ratings to view the plan as balanced, the agency said in a report authored by analysts Gabriel Petek and David Hitchcock .

The state Department of Finance also expects state finances will be liquid enough to cover intra-year cash deficits in the general fund without borrowing externally, S&P noted.

"Perhaps a more cautionary indicator than any modest softening of California's fiscal position in fiscal 2016 and 2017 is the emergence of a structural deficit in the coming years," S&P said. "According to the DOF's five-year forecast, baseline general fund revenue will begin falling short of existing spending commitments after fiscal 2018 despite the forecast assuming the economy avoids a recession."

S&P takes note that the state budget's operating position is projected to deteriorate even without the proposal containing any new material ongoing spending commitments, or doing anything to begin prefunding retiree health care benefits obligations for state employees.

"Future expenditure growth outpaces revenues under baseline projections," the S&P report said.

If voters in November approve an extension of the temporary income tax increase for higher earners they adopted in 2012, the state will face smaller deficits in coming years, and S&P said the budget will likely hinge on policy debates.

"Similar to recent years, we anticipate the final stage of California's budget negotiations will center on the policy tradeoffs implicit in the governor's recommended fiscal priorities," the rating agency said.

State lawmakers are supposed to adopt a final spending plan by June 15.

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