LOS ANGELES — If Gov. Jerry Brown's budget gets approved by the state legislature in the coming weeks, California will be on track to continue improving its credit quality, market experts say.
Brown, a Democrat, released a revised budget for fiscal year 2014-15 on May 13, in which he proposed using the state's surpluses to create a reserve and contribute to the state's underfunded teachers' pension system.
The plan projects $107.7 billion in spending from the general fund — a nearly $1 billion increase from his first budget proposal in January.
If passed by June 15, it would be the fourth consecutive year of on-time budgets for California.
"Even though we were at the bottom of the barrel, and still are very close to the bottom of the barrel as far as low credit ratings, this could elevate us," said Marilyn Cohen, founder of Envision Capital Management in Los Angeles.
After Brown's initial January budget proposal in January, Standard & Poor's revised the state's outlook to positive from stable, saying it could upgrade the A rating in the next two years if the proposed budget gets approved.
Analysts said Brown's proposal would build upon the improvements made to the state's finances in recent years.
"In particular, the plan's emphasis on debt repayment and appropriating funds to its reserve could be helpful in strengthening the state's fiscal position, in our view," credit analyst Gabriel Petek said in a credit report.
Fitch Ratings, which assigns California an A rating and stable outlook, said the budget proposal is a solid step toward fiscal recovery for the state. Analysts said it's consistent with the last three adopted budgets, which focused on shoring up the state's finances through prudent control of spending and budgetary debt repayment.
Brown's budget proposes to pay off the state's "Wall of Debt," as Brown terms the state's intrafund borrowings, payment deferrals, and other debt, by more than $11 billion this year and to fully eliminate by 2017-18.
The "wall" has been reduced to less than $25 billion today from $34.7 billion in 2011, when Brown took office, the administration says.
This year's budget proposal includes paying off the state's outstanding $1.6 billion Economic Recovery Bonds, which were authorized in 2004 to cover earlier budget deficits.
"This is taking a bite out of our long-term obligations," Brown said during a press conference in Los Angeles. "We're paying down our debts, we've got a plan for our teachers' retirement, and the rest is restraint. I want to leave town with California in a sound fiscal position."
The May revision includes a plan to begin tackling the state's unfunded liability to the California State Teachers' Retirement System.
Under the plan, the state, school districts, and teachers would together increase contributions by $450 million during the first year, which would grow to more than $5 billion annually in 2020-21.
The plan envisions taking 30 years to close the CalSTRS funding gap.
"As this proposal demonstrates, closing the Defined Benefit Program's nearly $74 billion funding gap can be resolved through gradual and predictable contribution increases, and the sooner those increases begin, the less risk to the state," CalSTRS chief executive officer Jack Ehns said in a statement.
Moody's Investors Service, which rates California A1 with a stable outlook, views the CalSTRS plan as positive over the long-term, but says in the near-term, much of the pressure would fall on weaker school districts.
Moody's — as well as the other credit rating agencies — also views favorably Brown's proposal to create and build a new rainy day fund, which was recently approved by the state legislature. It will go before voters on the November ballot.
The proposed constitutional amendment would require the state to annually deposit 1.5% of annual general fund revenue and capital gains revenues in excess of 8% of general fund revenue.
Moody's said the proposed rainy day fund is a credit positive because it reflects a new emphasis that California places on building reserves to cushion its finances from economic downturns.
Capital gains revenues exceeded the 8% benchmark last year, and the state expects them to do so again this year.
"The state projects that the proposed rainy day fund could put $3 billion into reserves and $3 billion to pay down debt in the first three years, which would provide a cushion, albeit a small one, against possible future budget deficits," Moody's said.
Standard & Poor's said the new reserve fund could help improve the state's credit quality, which would benefit from a more robust budget reserve.
Envision Capital's Cohen also views the fund as positive for the state, though she questions how it would be enforced.
"My only question is, if the new fund gets created, who is going to police the fund and make sure the state makes deposits?" she said. "There are a lot of states that have balanced budget verbiage in their constitution and this and that, but they never do it. So I'm thrilled that the discussion is going on, but I want to see it happen."
Brown's plan now goes to the state legislature, which will have three weeks to approve a state budget. Republicans have applauded the governor's fiscal restraint, while members from his own party, who control both houses of the legislature, have called for more spending programs and for restoration of social programs cut during the recession.
Assembly Republican Leader Connie Conway of Tulare said she is pleased that Brown has again shown caution in his budget plan.
"Fiscal responsibility must continue to be the state's guiding budget principle, even with this year's one-time tax windfall," she said in a statement. "Time will tell if the Governor can get his fellow Democrats in the Legislature to embrace this same spirit of spending restraint as we work toward a final budget proposal."
Assembly Speaker Toni Atkins, D-San Diego, called the budget a "solid starting point" for the final phase of budget deliberations.
"As we finalize the budget over the next few weeks, we will also look to expand opportunity by combatting child poverty, improving access to higher education, increasing funding for transportation projects, and taking strides to expand affordable housing," Atkins said. "Based on the Governor's May revision and the more than 50 hearings the Assembly has already held, I am confident we are on track for another on-time, balanced budget — one that will help solidify the state's fiscal position for years to come."
The state's nonpartisan Legislative Analyst's Office said the governor's budget revision largely aligns with priorities that the office has outlined, including building reserves, paying down debts, and starting to address the state's large retirement and other liabilities, especially to CalSTRS.
Following the release of the revised budget with its focus on CalPERS, the LAO said Brown deserves considerable credit for this "bold proposal" that advances an important discussion.
"Perhaps the most important issue for the Legislature is how it responds to the Governor's proposal to address CalSTRS' massive unfunded liabilities," Legislative Analyst Mac Taylor said in his "Overview of the May Revision" report. "Any legislative action on this matter likely will have major long-term fiscal implications for the state, school districts, and teachers."
The LAO also said that its own projections of general fund revenues from 2011-12 through 2014-15 are nearly $2.5 billion higher than the administration's estimates.
Lawmakers have said they would take the higher projection into consideration during budget hearings.