Explaining Southern California's economy

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

Schwarzenegger Holds Press Conference On Passing Of California Budget

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A view of the California State Capitol. The budget outlook is improving for the Golden State, but that doesn't mean there will soon be a lot of money on the bank.

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.

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Moody's raises a red flag about November California tax revenues

CA Governor Jerry Brown Holds News Conference On Pension Reform

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California Gov. Jerry Brown discusses pension reform during a news conference in Los Angeles. The state's revenue outlook deteriorated slightly in November.

The tax revenue outlook for California has been improving. But Moody’s, the big credit rating agency, reported Friday that the take for November was lower than expected. 

The agency wasted no time is raising a red flag about the sudden reversal of a positive revenue trend. November came in 11 percent lower than the state’s budget called for.

Emily Raimes, a Moody’s analyst with whom we've talked before at the DeBord Report, pointed out that the shortfall highlights the volatility of California’s tax revenues — a point I've been droning on about for months now. In the state, we're overly dependent on the incomes of the rich to make the budget work.

This is something that Raimes says Moody’s “sees in states with high wealth.” The same issue arises in New York and New Jersey. 

"California’s progressive income tax structure fuels the volatility; the wealthiest 15% of state taxpayers pay approximately 80% of all state taxes, according to the state’s audited financial reports," she wrote in a contribution to Moody's Weekly Credit Outlook.

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