Standard & Poor's report backs Gov. Jerry Brown's call to avoid new spending, focus on debt

MarketsAssociated Press

A new financial report released Wednesday backs Gov. Jerry Brown's call to avoid new spending, despite pressure from fellow Democrats to use the surplus on social services, higher education and other programs.

The credit rating service Standard & Poor's reported that California is at risk of slipping back into financial crisis if it doesn't treat recent revenue growth as a temporary infusion of cash and "build a modest cushion for the next downturn while beginning to address its existing long-term commitments."

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The report said California's comeback is due mostly to the state's spending reductions rather than recent tax gains. That is contrary to the popular belief that higher taxes and an improving economy lifted the state out of deficit.

The agency has upgraded the state's credit rating twice since 2013.

S&P analyst Gabe Petek said Brown and state lawmakers would repeat past mistakes if they rely on overly optimistic revenue projections to overextend spending commitments. That would put the state at risk when the next economic downturn hits because about half of the state's revenue comes from its wealthiest residents, making revenue volatile.

"For California a future revenue slump isn't only possible, it's expected," the report said.

Earlier this month Brown released a record $113 billion California spending plan that he described as precariously balanced. The governor is resisting calls for expanding social services and instead dedicates billions to paying down debt and saving for a rainy day.

He plans to work with lawmakers in the coming months to pass a final version in June.