California revenues get boost from stock market in 2018, but volatility in revenue stream remains a concern, says Gabriel Petek, a managing director for S&P Global.
“California’s credit quality could benefit from a more robust budgetary reserve,” S&P analyst Gabriel Petek wrote.

LOS ANGELES - Gov. Jerry Brown's proposal to allocate excess capital gains tax revenue to the state's rainy day fund could help improve the state's credit quality, according to Standard & Poor's.

Brown proposed the constitutional amendment last month and called a special legislative session to ask lawmakers to approve the plan for the November ballot.

"In our view, California's credit quality could benefit from a more robust budgetary reserve," Standard & Poor's analyst Gabriel Petek wrote in the report, released May 6. "Not only do we view the consistency of deposits under its existing reserve policy, Proposition 58, as weaker than those of numerous other states, but we have also cited California's revenue volatility as a limiting factor."

Standard & Poor's rates California A.

These two factors — a weak reserve fund mechanism and a volatile revenue base—have been a challenge to the state's credit quality over the years, Petek said.

A policy requiring more regular deposits, especially if it involves setting aside a portion of the state's tax collections when they spike, could help both of these issues, he said.

Brown's proposal would replace the current rainy day fund proposal, approved by the Legislature in 2010, set for the November ballot.

The Brown administration has said that the 2010 measure has several shortcomings, including the lack of a realistic option to pay down the state's debts and liabilities.

The new proposal would allow the Legislature and governor to either put short term spikes of capital gains revenue into the fund during boom years, or use that revenue to pay down budget debt and unfunded liabilities.

It would also increase the allowable size of the fund from the current 5% of the state's General Fund to 10%, limit withdrawals to make sure the state doesn't overly rely on the fund during the start of a downturn, and create a special reserve to smooth school spending under California's Proposition 98 school funding rules.

Standard & Poor's said that while no perfect way to neutralize revenue volatility exists, setting the threshold low enough to require deposits in most years could significantly strengthen the state's commitment to a budget reserve and help partly mitigate the effects of revenue volatility.

In addition, the flexibility to repay debt, as well as make supplemental payments against unfunded pension or retiree health care benefits, is "mostly favorable," according the report.

"But allowing these types of payments shouldn't be mistaken for a real solution to the state's underfunding problem relating to [the California State Teachers' Retirement System]," analysts said.

Required contributions to CalSTRS continue to remain below the actuarially recommended level, though any supplemental contributions are better than none, the report said.

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