Fitch: California Must Contain Spending to Continue Recovery

LOS ANGELES — Even though California is projected to have continued budget surpluses in the next few years, it still remains a long way from fully recovering from the effects of the two fiscal crises experienced in the past decade, Fitch Ratings said in a report released Friday Nov. 22.

"California is benefiting from an economic and revenue rebound, combined with three consecutive balanced budgets," the report said. "However, continuing this progress will require the state to resist restoring spending levels and prioritize the payoff of past borrowing for operations."

The California Legislative Analyst's Office published its fiscal outlook earlier this week, projecting budgetary surpluses through 2019, which Fitch considers a reasonable forecast.

The favorable outlook is the product of ongoing economic growth, recent temporary tax increases, and consistent state actions to maintain spending austerity at a time of rising revenues.

"Notwithstanding recent budgetary discipline, the state historically has had difficult restraining spending growth during periods of strong fiscal performance, setting the stage for more severe fiscal weakness in the inevitable recession that follows," Fitch said.

While Gov. Jerry Brown has emphasized the importance of eliminating the budgetary borrowing, mainly owed to schools, Fitch believes the state has other budgetary challenges beyond borrowing.

One major challenge will be correcting the underfunding of teacher pension contributions, which the California State Teachers Retirement System estimated to be $4.5 billion as of July 1, 2014.

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