UPDATE 1-California governor's budget restraint is right move-S&P

Thu May 16, 2013 4:53pm EDT

Related Topics

* 'Restrained approach' sets stage for budget talks

* Economic clouds on the horizon

* Retiree health, pensions, revenue volatility still worrisome

May 16 (Reuters) - The cautious view of California's revenue in Governor Jerry Brown's revised budget plan is a good sign for the state's near-term financial prospects but not enough to lift its credit rating, Standard and Poor's Ratings Service said on Thursday.

Credit implications for the government of the most populous U.S. state from the new plan are "broadly similar" to those spurred by Brown's initial budget proposal in January, the report said. The governor's "restrained approach" to forecasting revenue "helps set the overall tone for the coming weeks of final budget negotiations."

Following Brown's January proposal, S&P raised its credit rating on California's general obligation debt by one notch to A with a stable outlook from A-minus with a positive outlook.

Restraint remains in order as California's "fiscal and cash position continue to be stronger than at this point in 2012, albeit with some economic clouds on the horizon," according to S&P's report.

The rating agency's report came two days after Brown presented his revised budget plan for the fiscal year beginning in July. It proposed general fund spending of $96.4 billion, compared with $97.7 billion he proposed in his initial plan in January and this year's $95.7 billion.

Brown's revised plan released on Tuesday assumes a relatively tepid economy, reduced outlook for personal income growth related to spending cuts by the federal government in January and the effect of automatic federal cuts known as 'sequestration'.

California's revenue has jumped in recent months but the surge may prove fleeting as gains may be largely due to voter-approved tax hikes on the wealthy retroactive to last year and capital gains from asset sales ahead of higher federal income taxes that went into effect in January.

California relies heavily on revenue from personal income taxes, especially from the often volatile income tax receipts of its wealthiest taxpayers.

Brown was just as cautious in January when he presented his initial budget plan. But in a surprise move he forecast California's government could post surpluses due to improving revenue and if the economy strengthens.

Lawmakers would also have to support his plans to continue keeping spending in check to help the state end its long history of budget gaps.

Brown's fellow Democrats control the legislature and have grudgingly accepted steep spending cuts over the past two years. Lawmakers face a mid-June deadline for approving a budget for Brown to sign by the July 1 start of the new fiscal year.

S&P's report said Brown's revised budget plan shed more light on some of his major policy initiatives - notably a plan for a new approach to funding schools that has irked many lawmakers - but did not take up matters that are holding down the state's credit rating.

"Over the longer term, we continue to view the state's unfunded retiree health care liability, less than actuarial contributions to the teachers' retirement system, and volatile revenue structure as potential impediments to a significantly higher rating," the report said.

FILED UNDER: