Standard & Poor’s tells FOX Business that California faces a
downgrade to its outlook if the state doesn’t pass a credible budget in
time, as Democrat governor Jerry Brown continues to struggle to close a
$15.7 billion budget deficit.
California must submit a budget June 15. S&P says that although
California’s economy is about an eighth of U.S. gross domestic product
-- and is about the size of Italy -- its budget deficit is a huge 30% of
all 50 states’ budget deficit.
Gabriel Petek, an S&P analyst and co-author with analyst David
Hitchcock of a new report on California’s fiscal crisis, tells FOX
Business in an interview that the state “faces a downgrade to its
outlook” to negative “if it bungles its budget.”
Petek says that S&P is “keeping a close eye on budget gimmicks”
that the state has tried to use to paper over problems. Petek says that
the most populous state in the country, with an economy the ninth
largest in the world, already is “overly reliant on personal income
taxes” and that the state’s “tax structure is behind the deficit,
because it over relies on the personal income tax” as its source of
revenue.
He adds that “for California to rely on capital gains tax revenue
from things like the Facebook initial public offering is like looking
for change in the seat cushions.”
FOX Business has already reported
that California governor Jerry Brown was too optimistic in forecasting
more than $2 billion in expected state capital gains revenue over five
years from the social networking site’s IPO.
Even the state’s own legislative analysts told the governor’s office
its forecast was too rosy -- as investors could sit on the Facebook (FB) stock and not cash out, or simply move out of the state, among other things.
Already, California has seen a migration of upper bracket taxpayers
out of the state. It has the worst credit rating out of all 50 states at
single A minus.
Brown has backed steep cuts to social, health and welfare programs,
and is asking state voters to approve a ballot measure this November
that would hike the state's sales tax as well as personal income taxes
on the wealthy.
But S&P tells FOX Business that California’s problem is not just
due to over-spending, or large pension and retirement liabilities for
state workers, or an excessive tax burden.
Spending as a share of its economy is lower than at any time in the
past 39 years, and state retirement costs are not a current, but a
long-term problem, the S&P analysts note.
Instead, California’s main problem is its budget operation itself
Petek and Hitchcock call it a “dysfunctional” and “deficient” revenue
operation, which is in dire need of restructuring along the lines of
how New Jersey reformed itself.
Watch this rigmarole -- California’s state constitution requires it to enact a balanced budget.
But “it does not also require that the state end the fiscal year in
budgetary balance,” S&P notes. So an overflow of deficit hits the
next fiscal year’s books, continuously -- a chronic problem.
The state is also often strait-jacketed by constitutional
requirements on budget moves like tax and spending, including a
two-thirds majority of legislators to approve changes.
“So its ability to make straightforward budget adjustments is
complicated, a lot of times its budget gimmicks don’t work out,”
S&P’s Petek tells FBN.
Meaning, “the state passes budgets that balance on paper, but several
months later, the budget is again out of balance and out of whack,”
says Petek.
“With that track record, that’s why the state has such a big cash flow deficit,” Petek adds.
Worsened because the state, home to Silicon Valley and a huge housing market, has been careening from bubble to bubble.
Standard & Poor's has already warned in a report earlier this
year: "We could change the outlook to negative or lower the rating if we
believe the state's credit quality weakens through the budget process."
The credit ratings agency last February had upgraded California's
financial outlook from "stable" to "positive,” offering a glimmer of
hope to California that its credit rating of A-, the worst of all
states, might be upgraded, too.
Petek and Hitchcock note in their report that: “63% of California’s
tax revenues come from the personal income tax,” but that the state’s
tax revenues are “increasingly volatile” and “unpredictable.”
But the state’s economy is now more “heavily based on services rather than retail sales.”
So, does that mean a value-added tax on state services is headed California’s way?