California credit upgrade won't last long, analyst says

SAN FRANCISCO Fri Feb 1, 2013 5:29pm EST

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SAN FRANCISCO Feb 1 (Reuters) - California should enjoy upgrades to its credit rating while they last because they won't last long, HJ Sims' director of credit analysis said on Friday.

Standard & Poor's on Thursday lifted California to A from A-minus and gave it a stable outlook, citing improved finances, but veteran municipal debt analyst Dick Larkin said he doubts the factors fueling positive ratings actions can be sustained.

S&P expects the economic recovery and new revenue from tax hikes approved by voters in November will help Governor Jerry Brown's plan to swing the state budget, long plagued by shortfalls, to surpluses.

Larkin told Reuters he doubts California can hew to a path of fiscal prudence over the long term. He said that while the state's credit rating may see even further upgrades, they will inevitably retreat when recession returns.

"I think that after 35 years, I've got this pattern right," Larkin said. "California will probably get up into the double-A category but it will all fall apart again."

"When the crap hits the fan, you will see these ratings go in the can again," Larkin said.

California's credit rating will be threatened by the way the state's leaders respond to its boom-bust revenue cycle, said Larkin, who has tracked the state's financial ups and downs since the mid-1970s.

California S&P's credit rating started with a AAA in May 1968. It was AA in September 2000 at the time of the tech bubble, but it was cut to a record low of BBB in July 2003, when the bubble burst. It was a single A in February 2009 and then cut to A- in February 2010.

California's revenue jumps in good times and state officials open the spending spigot, and then when the good times end they drag their feet on reining in spending, setting the state budget up for deficits, he said.

"I don't know if that attitude will ever change in California," Larkin said. "They cut spending but nowhere near the amount that the spending was increased when revenues were flowing freely and the economy was smoking along."

Brown last month unveiled a state budget plan proposing modest spending increases while calling on fellow Democrats who control the legislature to embrace "fiscal discipline."

New revenue and spending restraint should put California on track for budget surpluses in coming years and allow it to pay internal loans and cover deferred payments used to help paper over its deficits over the past decade, according to Brown's plan.

"We view the current and proposed budgets as placing the state's finances on a more sustainable trajectory," S&P said in its report on its upgrade.

S&P, however, expressed caution, noting that "spending restraint will likely remain crucial" for California, which also faces fiscal risks if the economy falters and forces more austerity measures.

Brown has done a good job balancing California's current budget and rallying voters behind tax increases, Larkin said. But he doubts the political will to keep spending restrained as Brown proposes will be sustainable should revenue improve.

"You'll see agreement to get over this hump - and to spend the money when it comes back," Larkin said.

"It doesn't matter who the governor is. It doesn't matter who is in charge of the legislature," he added. "Fiscal prudence is not a high priority in California."

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Comments (2)
whyres wrote:
Your assumptions are based on conjecture of what you think our leadership will do in the future. That is a false assmuption. How do you know? Obviously you don’t have a crystal ball, and neither do I. I would say that CA has a bright economic future. We have a ton of shale oil that we could tap when the prices is right, and we are presently the ninth largest economy in the world. We provide a greater percentage of the US GDP than any other state. You have no evidence that the economy of CA, the US, and the Pacific Rim will implode anytime soon, or in the distant future. Tough choices will have to be made, but I have way more faith in the democratic super majority of CA than the ultra partisan divide that plagues our nations legislatures.

Feb 02, 2013 12:18pm EST  --  Report as abuse
whyres wrote:
“Fiscal prudence is not a high priority in CA,” is a false assumption. You cannot predict the future. We have a democratic super majority for the first time, and so let us see what they do with their ability to actually get things done without a minority constantly preventing substantive changes to be made to a system that without doubt has issues that need to be addressed in the near future.

Feb 02, 2013 12:26pm EST  --  Report as abuse
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