LOS ANGELES — California Gov. Jerry Brown's budget proposal for the 2018 fiscal year supports the state's credit quality as it recognizes the need to curtail spending in light of an anticipated slowdown in revenue growth, S&P Global Ratings said.
The report also said the budget comes amid rising uncertainty as the state has missed revenue forecasts several times over the past six months and cutbacks in Medicaid funding if Obamacare is repealed would harm the state.
The state has ratings of AA-minus, Aa3 and AA-minus from S&P, Moody's Investors Service and Fitch Ratings.
The governor's budget projected a deficit of $1.6 billion for the fiscal year if his proposals, which include slowing the growth of spending to generate $3.2 billion savings, are not adopted.
"Closing the budget gap requires more than a one-time fix, because the deficit is structural, meaning that absent corrective measures, the state would face shortfalls of $1 billion to $2 billion annually," S&P Analysts Gabriel Petek and David Hitchcock wrote in the report.
Brown's measures include scaling back funding increases for K-14 education by $1.7 billion, recapturing $900 billion in unspent one-time budget appropriations, and curtailing recurring spending on certain social services by $600 million, S&P wrote.
The budget gap represents a relatively modest 1.3% of annual general fund spending, said analysts, but it represents a departure from recent years when revenues and budgets repeatedly outperformed the state's own forecasts. Several years of improving fiscal condition enabled the state to significantly increase funding for education, establish certain anti-poverty programs, retire debts, and build reserves, analysts said.
"A slowing economy and federal policy uncertainty add risk to the state's fiscal landscape," Petek said. In addition, he added, "California faces daunting long-term challenges related to large unfunded liabilities."
In addition to the risk to the budget proposal from declining revenues if the stock market drops and reductions in federal funding if Obamacare is repealed, S&P analysts noted that many legislators who do not feel social programs have been restored from pre-recession levels might balk at Brown's cutbacks.
Legislators supporting higher spending levels could point to the Legislative Analyst's Office's revenue forecasts, which are $5.4 billion higher than those used by the Brown administration's Department of Finance, analysts wrote.