The Breakdown

Explaining Southern California's economy

For California, a budget surplus won't translate into a reserve

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52369 full

California may declare a surplus for its fiscal year 2014 budget. Unfortunately, the state won’t be able to put money in the bank for a rainy day.

That doesn't mean its outlook isn't looking up. The credit rating agency Moody’s likes what it sees in the Golden State's improved fiscal situation. In particular, the passage of Prop 30 last November — raising incomes taxes on wealthy Californians and sales taxes on everybody — bodes well for future revenues.

But getting the budget out of deficit and into surplus doesn’t mean the state will be prepared for the next inevitable economic bust. 

Moody’s analyst Emily Raimes blames a history of underfunding education.

“As revenues increase in the state in the next few years, additional revenues will have to be dedicated to bringing that education funding back to the baseline where it would have been if the state had not been doing that underfunding," she said.

Raimes added that other states will rebuild their reserves as the economy improves. She doesn’t say California can’t do the same, but she predicts it will be a challenge given the state’s volatile tax revenues.

The state relies too much on the incomes of the wealthy (just ask pro golfer Phil Mickelson, who recently, and controversially, suggested that he might pack up and head to income tax-free Florida). Raimes said tax revenues skyrocket when the economy picks up - and plunge when it turns down.

That’s why California has Moody’s second lowest rating: A1 on the agency's scale. Only Illinois is worse, at A2.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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