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S&P Worried About California Budget Gimmicks

A credit rating agency on Tuesday warned that California could return to budget gimmicks this summer, in part because a court has removed an incentive for lawmakers to pass a spending plan that is truly balanced.

The Standard & Poor's memo cautioned that the agency could revise its positive outlook on California's debt if the Legislature fails to pass a balanced budget by its June 15 deadline. S&P cited concerns stemming from two developments last month.

First, the deficit has grown as income tax revenue in April fell nearly $2 billion below expectations. Then a Sacramento judge ruled the state controller doesn't have authority to withhold pay from lawmakers.


That ruling undermines Proposition 25, a 2010 initiative approved by voters that bans lawmakers from getting paid if they fail to pass a spending plan. The initiative also lowered the legislative threshold for passing the state budget from a two-thirds vote, which requires support from both parties, to a simple majority.

S&P analyst Gabriel Petek wrote that the recent court decision, "coupled with what we see as reluctance among legislators to make additional difficult spending cuts, increases the risk of a less structurally balanced budget."

California has an A- credit rating, the lowest of any state. It received a positive outlook after the state made progress in making deep spending cuts last year.

H.D. Palmer, the governor's finance spokesman, said the state budget gap will be larger than the $9.2 billion estimated in January. But he said the state will be looking at a variety of economic indicators to determine a new revenue forecast, such as housing permits and unemployment, as well as the anticipated public offering for Facebook.

"We're going to have a plan to put forward in the next several weeks," he said of the governor's upcoming budget revision.


The nonpartisan Legislative Analyst's Office estimated that state revenues are about $3 billion below projections so far in the current year, which ends June 30.

Gov. Jerry Brown has proposed a $92.6 billion budget for the new fiscal year. Brown also has proposed an initiative for the November ballot that would fund education and public safety programs by raising income taxes on people who make more than $250,000 a year and increasing the sales tax by a quarter cent.

Democratic leaders have vowed to pass a responsible budget but are relying on the tax increase. Republicans oppose the tax hike.

"The fact remains that we still need a two-thirds vote to generate revenue," said Robin Swanson, a spokeswoman for the Assembly speaker's office. "This only underscores the importance of passing the governor's initiative."