SAN FRANCISCO — Standard & Poor’s said California’s midyear budget cuts are a credit positive, but its efforts to improve its budget through those cuts could be undermined if the cuts are thwarted.
Standard & Poor’s said it views the state’s use of “trigger” cuts as part of the budget as favorable for its credit quality because it likely helps reduce the size of the deficit next fiscal year. It rates California A-minus.
“However, we understand that some of the trigger cuts may be legally challenged,” analyst Gabriel Petek said in the report released Thursday. “To the extent they are blocked by the courts or otherwise not implemented, we believe their cash and budget balancing efficacy could be undermined.”
Shortly after Gov. Jerry Brown announced the implementation of nearly $1 billion of cuts this week, the Los Angeles Unified School District, California’s largest school district, said it would sue to block the state from cutting $248 million from school bus funding.
The spending cuts are a result of the Department of Finance’s forecast that revenue would be $2.2 billion below estimates for the fiscal year, triggering the reductions as built into the budget passed in June, which assumed $4 billion of revenue growth.
State finance director Ana Matosantos said nearly all of the tiered cuts proposed in the budget would be triggered, though education will be saved from more than $1 billion of additional reductions. Most cuts will be effective Jan. 1.
School districts, universities, community colleges, and human services will take the brunt of the cutbacks.
Petek said revenues have shown some upside, as the Department of Finance’s recent forecast came in rosier than the Legislative Analyst’s Office. The higher of the two forecasts was used to determine the size of the cuts. The LAO projected revenue would be $3.7 billion below expectations.
Matosantos said the differences between the two forecasts happened mainly because her department had another month of data to review.
Standard & Poor’s said the department projects personal and corporate income taxes, insurance taxes, and other revenues combined to be $2.2 billion higher this fiscal year than assumed in the budget.
But Standard & Poor’s also noted that the state expects sales and use tax to be 1.2% below budget expectations.
The report added that the gap expected for the next year could be less than the $13 billion projected by the LAO because of the Department of Finance’s higher forecast.
However, the rating agency said some of the cuts in the fiscal 2012 budget are proving hard to achieve, such as a $2.4 billion reduction for health and human services, because they require consent from the federal government.