January 17, 2023
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Stability fund could pave way for California out of budget hole


In a race to the bottom for state credit ratings, ongoing problems with California’s budget underscore the Golden State’s precarious position.

A report in Barron’s on Aug. 27 ranks California 49th out of 50 states in both its credit rating and how much it has to pay to finance new debt. California is rated A1 — still investment grade — and it pays an average of 66 basis points over the rate for AAA-rated 10-year bonds.

Only Illinois has a lower credit rating (A2) and it pays a hefty 157 basis points over AAA-rated bonds.

It turns out that California’s pension liabilities as a percent of the overall economy are below average but that its overall debt is well above average in relation to other states when compared to statewide GDP.

The Barron’s report shows that California has not yet sunk as low as Greece, but it behaves a lot like Spain or Italy when it comes to paying for its debt. That means investors do not entirely trust the state’s ability to rein in its persistent budget deficits.

In contrast, Connecticut ranks dead last in Barron’s list but it has an AA credit rating. Even though debts have soared and pension liabilities are a hefty 9 percent of GDP, Wall Street believes that Connecticut’s big deficits are the result of the Great Recession and that the Nutmeg State will  regain or raise revenue and hold the line on spending as the recovery proceeds. Barron’s also concludes that the rating agencies may be a bit behind the curve when it comes to rating Connecticut.

For California, getting the structural budget deficit under control seems paramount. These deficits have persisted for more than a decade — even firing Gray Davis and hiring the Gubernator could not close them. Nor could the spectacular success of Google’s IPO earlier this decade or Facebook’s fizzled IPO this year.
California desperately needs to fix its volatile stream of income tax revenue and curb its unending appetite for spending from the general fund.

My own view is that a stability fund should be put into place to hold and recycle windfall IPO tax revenue the way the Norwegians recycle their oil windfall.
One low-cost way to do that would be having pension giant CalPERS manage the cash and disburse it at just 5 percent of principal per year.

But get ready for a big fight — if you think Social Security retirees are going to be cranky about reforming entitlements, wait until somebody gets serious about limiting the size of the legislature’s cookie jar.

• Contact Editor Henry Dubroff at hdubroff@pacbiztimes.com.