CA Credit Rating Nothing to Celebrate

JAN. 17, 2012

They were slapping high fives in the offices of state Treasurer Bill Lockyer this week. Why the celebration?  Because California no longer has the nation’s worst credit rating, according to Moody’s Investors Service.

“The reason we’ve improved our standing,” said Tom Dresslar, spokesman for the treasurer’s office, “is because of the actions that the Legislature and the governor have taken last year, with regard to the budget.”

To wit, he elaborated, “They took some major steps to solving our structural deficit, and we started to pay down what the governor calls ‘the wall of debt.’ And those steps have not gone unnoticed by the rating agencies and they have given us credit for those actions.”

Well, not exactly Tom.

First of all, California really did not “improve” its standing. It simply moved from worst to next to worst because Moody’s downgraded Illinois (which, it should be noted, has a Democrat governor and Democrat-controlled state Legislature, just like California).

Also, neither Moody’s nor the other two major credit-rating agencies — Standard & Poor’s and Fitch Group –have really “given (California) credit” for the actions Gov. Jerry Brown and the Legislature took last year on the state budget. In fact, S&P and Fitch continue to rank California’s creditworthiness 50th among the states.

‘Missed Opportunity’

S&P said last summer that the budget the party of Brown enacted amounted to “a missed opportunity” because it failed to address the “backlog of budget obligation accumulated during the past decade.”

Fitch declared California’s fiscal and credit prospects “clouded,” not the least because of “extensive budgetary pressures confronting the state’s constrained financial flexibility stemming from voter initiatives.”

What particularly resonated was Fitch’s admonition that California’s credit rating should not be so low “considering the size and breadth of the state’s economy and tax base” as well as “the strength inherent in a state’s sovereign powers.”

Indeed, California continues to boast one of the world’s 10 largest economies. The state government collects $90 billion or so in annual revenues. If the budget-making process in Sacramento hadn’t long been so dysfunctional, the state would not now be struggling with its structural deficit. It would not have the nation’s worst credit rating.

Dresslar estimated that the state’s structural deficit is $9.2 billion. He also maintained that Gov. Brown’s proposed 2012-2013 budget will eliminate that structural deficit and, in turn, move the Golden State up a tier or more in the credit ratings.

Trickeration

But the governor’s budget relies on the same kind of fiscal trickeration that produced the backlog of budget obligations to which S&P referred. Most noteworthy, he includes $6.9 billion worth of tax hikes in his budget that require the unlikely approval of California voters.

Without those tax hikes, the governor’s budget falls apart, as a new report this week by the state Legislative Analyst’s office attests. And once that happens, we’ll see the same excruciating fight in Sacramento over taxes and spending that we’ve witnessed for far too many years.

Some say that California’s perennial budget problems are unsolvable. But that is not so. All lawmakers need do is study the best practices of the states that the credit rating agencies rank in their top ten.

Aside from their enviable creditworthiness, those states have four things in common:

They control their spending, not letting yearly outlays outpace inflation and population growth. They do not create (or expand) state programs anticipating new revenues that may not materialize.

They prepare for lean economic times by setting aside windfall tax revenues during economic boom times. And they keep their tax burdens among the lowest in the country, recognizing that lower taxes lead to greater economic growth and more overall tax revenue flowing into state coffers.

– Joseph Perkins