UPDATE 3-California governor defends restraint in state budget plan

Thu Jan 9, 2014 8:29pm EST

By Sharon Bernstein and Rory Carroll

SACRAMENTO, Calif. Jan 9 (Reuters) - California's Democratic governor took a stern line on fiscal restraint as he released a $107 billion budget plan on Thursday, potentially inviting a fight with more progressive state lawmakers who want to restore spending on social programs cut during the long economic downturn.

Governor Jerry Brown challenged lawmakers who want more spending on schools, healthcare for the poor and other services to make their case while passionately defending his plan for the next fiscal year's budget at a news briefing.

"Prudence is very difficult when the money is in," said Brown, who proposes more funding for education while paying down billions of dollars in debt and cutting spending on Medicaid, the federal-state healthcare program for the poor. "When the money is in, everybody wants to spend it."

Brown, who supports a constitutional amendment to enshrine a rainy day fund into law, proposed a budget for the fiscal year beginning in July that sets aside $1.6 billion in reserve, taking advantage of strengthening revenue.

He proposes increasing spending by 9.5 percent for kindergarten-12 education and 10.8 percent for higher education, while spending on health and human services would rise 1.6 percent to $28.8 billion.

Spending on health and human services would still be below pre-recession levels even as general fund spending would rise by 8.5 percent to $106.8 billion to top a pre-recession peak.

The plan drew immediate criticism from advocates for the poor. "People in our communities are frustrated," said Pete Woiwode, an advocate with the California Partnership. "This is clearly how the governor plays ball. He holds all the cards."

Democrats control large majorities in both houses of the legislature. But Brown has charted a centrist path, sometimes alienating more liberal members of his party with tight-fisted fiscal policies credited with helping the state right its finances and persuading voters to adopt temporary tax increases in 2012.

Brown has repeatedly called for restraint since he ended a decade of budget deficits in June by signing a budget for the current fiscal year with a surplus and setting aside $1.1 billion in reserve, so lawmakers should not expect he will budge much, said Jack Pitney, a professor of government at Claremont McKenna College.

"They want the candy, and he's the dentist who says they can't have it," Pitney said.

DEMANDS BY PROGRESSIVES

Top Democrats in the legislature have called in recent weeks for a more progressive budget agenda that would include funding for pre-kindergarten for all 4-year-olds. They would also like to restore some of the deepest recession-era cuts to social services.

But on Thursday, Senate President Darrell Steinberg and Assembly Speaker John Perez declined to criticize Brown, whose plan does offer some concessions to progressives, such as $64.7 million to give undocumented immigrants drivers licenses.

Steinberg, whose press aide referred to upcoming budget talks as a "five-month dance" with Brown, praised the governor's fiscal restraint but also hinted at his own agenda. Brown will present a revised budget plan in May that will kick negotiations into high gear.

"I appreciate the governor's aggressive approach to more than double the reserve and pay down debt even more quickly than we had hoped," Steinberg said in a statement. "At the same time, we must invest in the people of California, especially those living in the economic margins."

In announcing the plan, Brown reaffirmed his support for more crude oil production in California and said he opposes a proposed tax on it. Republicans do as well, and they generally applauded Brown's budget approach.

"While I may question the wisdom of some of the governor's spending priorities, I was pleased with his stated commitment to fiscal restraint," Republican Senator Mimi Walters said.

While Brown has said he wants to steer clear of budget gimmicks, his plan raised eyebrows for proposing using $250 million in funds raised through California's carbon trading program to support a planned high-speed rail project, which could eventually help lower greenhouse gas emissions although its construction would increase them.

The plan also assumes a panel of federal judges will grant a two-year extension to a long-fought order to reduce crowding in California's troubled prison system, which would save the state $90 million next year.

"That can charitably be described as aspirational," Pitney said.

The judges have not been receptive to granting long extensions and last June threatened to hold Brown in contempt of court if he did not comply with the order. Brown said he would take money from mental health and anti-recidivism programs for inmates if the judges do not grant the extension.

WARM RECEPTION ON DEBT MARKET

Brown's plan received a warm reception on the $3.7 trillion U.S. municipal debt market, where two of three major credit rating agencies whose opinions influence the state's borrowing costs have cited California' strengthening finances in upgrades to its general obligation ratings over the past year.

The upgrades by Standard & Poor's and Fitch Ratings reflect California's improving economy and revenue as well as how Brown, elected to his third term as governor in 2010, has forced deep spending cuts to help close deficits, rallied voters behind tax increases and won support from lawmakers for paying down debt.

California's finances were in a constant roil in the previous decade, and three years ago state leaders faced a $25.4 billion budget gap and comparisons to economically and financially beleaguered Greece.

"Think about how much that has changed," said Howard Cure, director of municipal research at Evercore Wealth Management in New York, which manages $4.9 billion in assets.

S&P analyst Gabriel Petek said Brown's plan "looks fairly positive from a credit standpoint," adding that it acknowledges many concerns of investors.

The plan points to the challenge of unfunded pension and retiree health liabilities of nearly $218 billion and urges paying down internal loans and making good on deferred payments the state used to help balance its books in previous years.

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