SAN FRANCISCO Feb 1 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
"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
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."