Gov. Jerry Brown touts California’s comeback but urges “prudence” on spending


In yesterday’s state of state address, Gov. Jerry Brown touted California’s economic and fiscal comeback but cautioned lawmakers to exercise “prudence” when it comes to new spending.

When Brown took office in 2011, the state was reeling from the Great Recession. The unemployment rate was in the low teens, and tax revenue shortfalls plunged the state into a deficit of $34.7 billion, which lawmakers tried to mitigate with steep cuts to education, health care, and social services.

Three years later, California’s unemployment rate has dropped to about 8.5% buoyed by the 1 million new jobs, and this year the state is expected to achieve a modest budget surplus – the first since 2001.

“What a comeback it is!” said Brown. “For a decade, budget instability was the order of the day. A lethal combination of national recessions, improvident tax cuts, and too much spending created a financial sinkhole that defied every effort to climb out. But three years later, Here we are with state spending and revenues solidly balanced and more to come.”

Brown attributed the state’s improved fiscal health to difficult budget cuts, revenues from Proposition 30’s temporary sales and income tax hikes, and the passage of Proposition 25 that broke the partisan gridlock by requiring just a simple majority for the passage of the state budget.

The tax revenue for 2014-15 is projected to grow by nearly $6 billion (nearly 6%), possibly resulting in a modest $2.3 billion budget surplus.

“This year, Californians have a lot to be proud of,” Brown said.

But Brown, who is likely to run for re-election this year, repeatedly cautioned his Democratic colleagues in the state legislature to exercise “prudence” when it comes to spending.

“We’re not out of the woods,” said Brown. “While we know our revenues will fluctuate up and down, our long-term liabilities are enormous, and they’re ever growing.”

The governor pointed out that the revenue growth is driven by capital gains from stocks and other investments, which are volatile, and Proposition 30 sales and income tax increases scheduled to expire in 2019.

Brown emphasized that the state still needs to pay down its $24.9 billion “wall of debt” owed to local governments, schools, community colleges, loans and other deferrals incurred during the recession.

California also has to address other long-term liabilities, such as the $217.8 billion of unfunded state workers’ pensions and retirement health care costs and the $65 billion to repair and maintain roads and other public infrastructure put off due to budget shortfalls.

In addition, Brown noted that lawmakers must account for future risks, such as natural disasters, federal funding cuts, and the uncertainty over the costs of implementing the Affordable Care Act.

Given these considerations, he argued, lawmakers should refrain from enacting new spendings. Instead, Brown’s budget proposed some increases to education (10%) and health and human services (1.6%) but focused on paying down the wall of debt ($11 billion) and holding most of the surplus ($1.6 billion) in a rainy fund created by Proposition 58.

“We can’t go back to business as usual. Boom and bust is our lot,” said Brown. “To avoid the mistakes of the past, we must spend with great prudence and we must also establish a solid rainy day fund locked into the Constitution.”

Brown asked lawmakers to amend Assembly Constitutional Amendment (ACA) 4, which will be placed on the November ballot, to allow more flexibility. ACA 4 would require the state to set aside 3% of its general fund revenues in a rainy day reserve. Brown said ACA 4 should be changed to give the state “the option of paying off its debts” and to address the fluctuations with Proposition 98 education funding (which is tied to property taxes) as well as fluctuations on capital gains revenue.

“Overcoming this challenges will test our vision. It’ll test our discipline. It’ll test our ability to persevere,” said Brown. “But overcome them, we will, and as we do, we will build for the future, not steal from it.”

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