Capitol Alert

Ratings agency Standard & Poor's raised concerns today after California income tax revenues fell short in April and a judge ruled the state controller cannot withhold legislative pay based on budget quality.

In its review, the agency said the two developments "could weaken the state's prospects for further improvement in its fiscal structure," though it noted that this outcome is not inevitable.

S&P did not downgrade California's worst-in-the-nation A- credit rating, though it used today's report to suggest the latest developments could threaten the progress the agency has praised in recent months.

California fell nearly $2 billion shy in personal income tax revenues in April, the state's biggest collection month, according to state Controller John Chiang. The Legislative Analyst's Office estimated last week that California is running about $3.5 billion behind Gov. Jerry Brown's forecast for the fiscal year to date in personal and corporate income taxes. The LAO also said the state could also be short by a few billion dollars by June 2013.

A Sacramento Superior Court judge last week ruled in favor of state lawmakers who alleged that Chiang violated the state constitution last summer when he withheld their pay for 12 days for submitting a budget he considered out of balance. Judge David I. Brown ruled that Chiang had overstepped his bounds, and that the Legislature has broad authority to determine for itself when a budget is balanced.

Brown's ruling posed more of a worry for S&P, which stated, "This decision, in our view, may open the door for the Legislature to potentially rely on budget maneuvers that may be politically expedient but fiscally unreliable when devising deficit solutions."

The agency stated further, "We believe that the Steinberg decision, coupled with what we see as reluctance among legislators to make additional difficult spending cuts, increases the risk of a less structurally balanced budget for fiscal 2013."

Update (5 p.m.): The Legislative Analyst's Office revised its April estimates to say that general fund revenues are lagging by about $3 billion for the fiscal year to date, which accounts for a shortfall in income taxes but a slight boost in sales and insurance taxes. The Analyst's Office still says Brown's revenue forecast is likely a "few billion dollars" short through June 2013.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, issued the following statement in response to S&P's comments:

"We know we have a task ahead of us and we are prepared to make the tough decisions required to balance a credible budget on time. The S&P report acknowledges the tremendous progress we have made in tackling the deficit and there is no reason to assume this year will be any different. We are hopeful that this budget coupled with the Governor's tax initiative will help us put an end to the deficit cycle. The court decision upholds the language of the state constitution, reaffirms that a third party has no authority to arbitrarily invalidate a budget and has not fundamentally changed any aspect of the budget process. To imply otherwise is presumptuous."