As California Gov. Jerry Brown winds down his final year in office, he leaves the state in a stronger position to withstand an economic recession, according to a Fitch Ratings report released Monday.
Changes instituted under his administration provide the state with more financial flexibility and have reduced the potential for political gridlock that led to long budget stand-offs in past years, Fitch said.
A figure in state politics since the 1970s – when he began his first stint as governor – Brown was able to use his popularity to “successfully campaign to raise taxes, establish a rainy day reserve and budget conservatively,” according to the report.
“The changes as a collective have all helped the state to take advantage of this period of expansion and positions it per our expectations of better performance through a downturn,” Karen Krop, a senior director at Fitch, said in an email.
Brown's successor may not have the same advantages and may face additional budgetary pressures.
Lt. Gov. Gavin Newsom, a fellow Democrat backed by Brown, and Republican businessman John Cox face off in the November election for governor in the heavily-Democratic state.
California has seen its economy — recently designated the fifth-largest in the world — boom during what has been the second longest period of economic expansion in U.S. history.
Brown signed his final budget in mid-June — a $199.6 billion spending plan that includes a $9 billion surplus.
The Fitch report noted that in past economic cycles, periods of boom have been followed by equally steep downturns. California’s tax structure that relies heavily on income taxes — particularly capital gains taxes — make it especially vulnerable during a recession, the report said.
Brown was elected to his second stint as governor in 2010, when California's revenues dropped as its budget gap increased during the recession. Prior to 2012, the state legislature often missed the July 15 deadline for passing a budget because of a requirement for a two-thirds super-majority.
“Governor Brown has maintained a conservative posture with respect to estimating revenues and adding ongoing spending to the budget, preferring to apply excess revenues to one-time spending as well as preparing for the inevitable downturn by saving and reducing liabilities,” the report said.
Krop said a 2010 measure that lowered the threshold for budget passage to a simple majority was key to reducing gridlock and recovering from the downturn.
Another significant reform was the establishment of a rainy day reserve that is expected to have $9.4 billion set aside for economic uncertainty by the end of fiscal year 2018, the report said.
During his tenure, Brown also won passage of a sales tax increase; shifted funding and responsibility to local government for some public safety and health programs; and ended the state’s redevelopment program which freed up more funding for schools.
Fiscal challenges for the next the governor include health care expansion, higher education costs, housing and the impact of federal policies such as tariffs on trade.
One challenge that could hit soon is a possible repeal of a 12 cents gas tax for transportation that voters will decide in the November election. Republicans mounted a campaign to cut the tax through a ballot measure after Brown won passage of the increase last year as part of a plan to invest $5.4 billion a year in infrastructure.
Krop said a repeal would be “a fairly significant setback” to the projects that are part of the plan.
“For California to maintain or improve its credit quality, it not only needs to be able to weather a downturn, but also to continue to balance the competing service demands of its expanding population and economy while maintaining strong budget and fiscal management,” the report said.