SAN FRANCISCO — As California lawmakers work this week to hammer out a balanced budget by Friday’s deadline, Standard & Poor’s weighed in Monday with its take on the state’s dysfunctional spending plan.

“California’s consistent inability to balance its budget has, in our view, material credit implications that go beyond the struggle to comply with its constitutional mandate,” the report said.

Democratic leaders, who hold the majority in California’s Legislature, are working this week on closing a $15.7 billion shortfall, with a constitutional deadline of Friday. Fellow Democrat Gov. Jerry Brown has proposed a $91.4 billion budget.

After Standard & Poor’s raised the outlook on the state’s A-minus in February to positive from stable, Brown’s administration hailed it as evidence of the success of its first budget.

But the rating agency has said that outlook could be pulled back if lawmakers are unable to pass a spending plan using credible solutions.

“California’s rating is low, however, among the states and reflects our view that its budgetary performance — one of the five broad analytic factors we consider in evaluating state credit quality — is especially weak,” the report said.

Standard & Poor’s said the state’s budget gap represents about 30% of the total deficits faced by the states for the upcoming fiscal year, even though it has a 13% share of the national economy.

The agency said the state’s “fiscal morass” is mainly a result of slowing tax revenue growth and volatility and higher dedicated spending on education. Standard & Poor’s said it is a mistake to blame California’s current financial shortfall on over-spending, large pension and retirement liabilities or an excessive tax burden.

Because of the proposition system in California, much of the state’s revenue is already allocated, with the majority to education, and lawmakers have little wiggle room each year. Plus, the Legislature needs a two-thirds majority to pass any new taxes.

An antiquated tax system is not helping, the report said.

Standard & Poor’s said California’s economy over the past several decades has evolved into a more service-based economy, but its current tax system remains unchanged. The state’s sales and use tax continues to only apply to consumer goods and ignores services.

As a result, the state is now more reliant on personal income taxes for revenue from the service and intellectual capital sectors, such as high technology, and less on sales and use tax revenues.

The governor’s budget proposal for the year ending June 30, 2013, uses personal income taxes for 63% of total general fund revenue, according to the ratings agency. And the state’s spending plan has become more dependent on top earners.

Standard & Poor’s said in 2010, California relied on 1% of taxpayers for 11% of general fund revenues compared to 1979, when the top 1.05% of taxpayers funded just 2.7% of the general fund budget.

The Democratic governor has proposed cutting $8.3 billion — mainly from education, Medicaid and social services — to help fill the budget hole.

His plan also relies on $5.9 billion in higher revenue estimates, partly from a proposed temporary tax hike that voters must approve and from the recent Facebook Inc. initial public offering. The social network has seen its share prices drop about 30% since the May 18 IPO.

The November tax initiative would temporarily increase the state’s sales tax by one-quarter of a cent to 7.5% and raise taxes on income starting at $250,000, with rates on those making more than $1 million rising to 13.3% from 10.3%.

Standard & Poor’s called the tax measure “an emergency measure of sorts.”

The rating agency said even if the temporary tax increase gets voter approval, general fund revenue would still be 6.7% below its 2008 peak.

Like Standard & Poor’s, Fitch Ratings rates California A-minus. It’s outlook is stable. Moody’s Investors Service rates California A1, two notches higher, and only Illinois’ credit rating is lower.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.