Standard & Poor’s attributed California’s improving budget outlook more to reduced discretionary spending than to tax increases passed in 2012. The fourth-term governor, a relatively moderate Democrat, is under pressure from social service advocates and some lawmakers of his own party to restore services cut during the recession.

This is a crucial point. Many Democratic lawmakers cite Proposition 30’s temporary sales- and income-tax increases as putting the state on the path toward fiscal stability. But to outsiders crunching the numbers, what’s been even more important is Brown’s refusal to go along with the old theory of “baseline budgeting,” which holds that state agency spending must go up by at least the amount of inflation every year, no matter what.

The Bee, unlike most papers, also noted an S&P warning:

“For California, a future revenue slump isn’t only possible, it’s expected,” the credit rating agency Standard & Poor’s said in a report.

An over-optimistic assessment of the state’s future revenue growth, the report said, would be “the most significant identifiable threat to the state’s ongoing fiscal recovery.”

S&P wary of pension bailout costs

But what got no coverage that I saw was S&P’s warning about the immense headaches that state leaders will face as the CalSTRS bailout costs kick in. Here’s the short version: “the state teachers’ retirement system (CalSTRS) is in need of a long-term funding strategy. ”

The bailout mandates that total annual contributions to CalSTRS go from $5.9 billion in 2014 to at least $10.9 billion in fiscal 2020-21. Of the additional $5 billion, 70 percent is to come from school districts, 20 percent from the state general fund and 10 percent from teachers. But since school districts get nearly all their money from the state, the deal actually is likely to require that the state come up with an extra $4.5 billion a year in fiscal 2020-21. The prospect that school districts will be forced to cut elsewhere to pay for the bailout is unlikely.

This is from a May 2014 Cal Watchdog look at the daunting long-term budget numbers:

[We will see] perpetual junkyard-dog budget fights in which the CTA and CFT — determined to grab every last dollar to maintain the status quo of teacher pay raises — fight constantly over funding with every competing lobby or interest group.

Why? Because the bailout is going to cost so much, and in the zero-sum game of state budgeting, the question is whether the cost is absorbed in the larger K-12 state budget — or out of the hides of other state programs. … 

The CTA and the CFT didn’t achieve their dominance of Sacramento by playing nice. Covering the cost of the CalSTRS bailout going forward is going to be the Sacramento version of the federal budget sequester for non-education budget categories. Spending on just about everything but K-12 is going to be curtailed.

It the next year or two, as this sinks in, the push to make the Proposition 30 sales- and income-tax hikes permanent is likely to go from background noise to the biggest issue in Sacramento.

By Joseph Perkins

California’s rock-bottom credit rating has been attributed in some quarters to the state’s most recent economic downturn, from which Gov. Jerry Brown said this past spring, “We are still recovering.”

But a new study by the Pew Center on the States suggests that California’s abysmal credit rating is neither a recent development, nor attributable to the recent recession. In fact, California has been the least creditworthy of the 50 states over the past 11 years, according to Pew.

That included periods during which the state economy was mired in recession, from 2007 to 2009; and, before that 2000 to 2002 (following the dot-com bust). But it also included the state’s economic boom between 2003 and 2006 (fueled by the housing bubble).

And it included the administrations of three governors: Gov. Gray Davis, in office 1999 to 2003, who was recalled largely because of his fiscal irresponsibility. Gov. Arnold Schwarzenegger, 2003-2011, who was elected on promises that he would “terminate” the state’s fiscal problems, but only made them worse with excessive spending increases and tax hikes; and Brown, 2011-12, who is doing an Arnold imitation.

The business cycle affects all 50 states. But, explained Pew’s Steve Fehr, “The states with the lowest grades,” like California, “typically have trouble keeping their spending in line with their tax revenues.”

That’s why California’s credit is currently rated A- by Standard & Poor’s, the lowest among the states.

That means the Golden State’s debt is rated closer to triple-B, which amounts to junk-bond status –than it is close to triple-A, S&P’s highest rating, which, according to the credit rating agency, indicates an “extremely strong capacity to meet financial commitments.”

Back in February, state officials congratulated themselves after S&P upgraded its financial outlook for California from “stable” to “positive,” holding open the possibility that the state’s credit rating might rise from A- to A (which would still rank lowest among the states).

“The fact that California’s ratings outlook has shifted from negative to positive in less than a year in a powerful vote of confidence in our state,” said Brown in a statement.

S&P warning

As it turned out, the self-congratulations were premature. In March, S&P issued a report noting the unwillingness of Brown and the Legislature to take the steps necessary to eliminate the state government’s structural deficit.

“In our view,” the report stated, “a waning appetite for more budget austerity among lawmakers could present a hurdle to timely and realistic budget solutions, which could interfere with the state’s credit quality to strengthen.”

S&P’s March report was followed by a report this past May. It found: not only might its upgrade of California’s financial outlook be short lived, the state’s credit rating could be downgraded as well.

“We could change the outlook to negative or lower the rating,” the credit-rating agency warned, “if we believe the state’s credit quality weakens through the budget process.

Last month, Brown and the Democratic-controlled Legislature enacted a budget for fiscal year 2012-13, which began on July 1, that does not have the spending cuts S&P was looking for, based on its March report, and that will not be “balanced” unless California voters approve Proposition 30, the governor’s $8.5 billion tax hike.

It’s doubtful S&P will look favorably upon this year’s budgetary legerdemain in Sacramento. The question is whether the credit rating agency will downgrade California debt even lower than it already is.