The Volcker Alliance on California

As reported in today's NY Times, The Volcker Alliance has released a report on state budgeting practices (Truth and Integrity in State Budgeting). From the discussion of California's practices (pages 18-26):

Once tied with Illinois for America’s lowest state general obligation credit rating, California now stands out as a budget reformer. Since 2013, its general obligation bond debt has garnered multiple upgrades from Moody’s, S&P, and Fitch. 

Until recently, the state employed a wide array of moves to achieve short-term budget relief via a significant amount of public debt, spending deferrals, and other obligations. Since 2010, when Democrat Jerry Brown was elected governor after winning the office twice in the 1970s, the budget approval process has been changed. It has changed to a legislative majority vote versus two-thirds approval for passage—and taxes have been raised, although some of the increases are temporary. 

The state won voter approval for additional improvements, including strengthening budget reserves, pension funding, and long-term debt reduction, as well as requiring revenue and expenditure forecasts from the executive branch that extend for three years beyond the upcoming budget year. It has also taken steps to improve teachers’ pension funding, though this is being accomplished in part by pushing the costs from the state to local school districts. 

Risks remain for California. The state is still saddled with $94.5 billion in bond debt supported by tax revenue, and it has amassed another $195 billion in unfunded promises to pay pension and other retiree benefits. Its revenue remains highly dependent on capital gains taxes, which means the state is hostage to the vagaries of the stock and real estate markets. 

Further, California has a $64.6 billion shortfall in deferred infrastructure maintenance, according to the California Five-Year Infrastructure Plan of 2014. It remains too early to tell if the state’s fiscal culture has changed permanently or if California will revert to its previous tactics in the next economic or stock market downturn...