Capitol Alert

California scores lowest on Moody’s fiscal ‘stress test’

Gov. Jerry Brown carries notebook paper after unveiling his proposed 2016-17 state budget at the Capitol on Jan. 7. Brown warned that the state is overdue for a recession and needs to build reserves to cushion the effects of an economic downturn.
Gov. Jerry Brown carries notebook paper after unveiling his proposed 2016-17 state budget at the Capitol on Jan. 7. Brown warned that the state is overdue for a recession and needs to build reserves to cushion the effects of an economic downturn. rbyer@sacbee.com

California, whose state budget is highly dependent on volatile income taxes, is the least able big state to withstand a recession, according to a “stress test” conducted by Moody’s Investor Service.

Arch-rival Texas, meanwhile, scores the highest on the test because of “lower revenue volatility, healthier reserves relative to a potential revenue decline scenario and greater revenue and spending flexibility,” Moody’s, a major credit rating organization, says.

Among major states, New York, Pennsylvania and Florida fall somewhere between California and Texas.

Moody’s report could help Gov. Jerry Brown this year as he resists pressure from fellow Democrats in the Legislature to increase spending, particularly for health, social and pre-school services, and pump more revenue into a “rainy day fund” that voters, at his behest, created in 2014.

Brown has frequently voiced fears that the state is overdue for another recession, and without a hefty cushion, could be forced to make deep spending cuts if one hits.

Moody’s notes that because of its dependence on personal incomes taxes, especially those from high-income residents, California saw a 17 percent General Fund revenue drop when recession hit in 2002 and a 12 percent decline in 2009 when another struck the state.

Conversely, it also recorded the greatest one-year revenue increase, 20.3 percent, of any of the large states, also thanks to income taxes.

Ironically, although Brown warns of the state’s volatility, he also is responsible for increasing it by sponsoring a 2012 ballot measure that temporarily raised income taxes on the highest-income taxpayers. This year, a ballot measure will propose to maintain those higher rates for another 12 years.

In addition to revenue volatility, the Moody’s report also cites California’s relative inflexibility on the spending side of the budget ledger and the fact that the Legislature needs a two-thirds vote to raise taxes, both of which expose it to greater peril if recession strikes.

California not only suffers in comparison to the other large states, but in a broader survey of the 20 most populous states. Missouri, Texas and Washington score highest, while California and Illinois are at the bottom in their ability to withstand a recession.

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