California's Brown Is Leaving Behind Fully Funded Piggy Bank

(Bloomberg) -- Here’s one plus for bond investors worried about the end of California Governor Jerry Brown’s reign: he’s leaving his successor a rainy-day fund at the constitutional maximum for the first time.

In the budget for the year beginning in July, Brown, a term-limited Democrat, and legislative leaders have agreed to steer more money than is legally required to the reserve account approved by voters in 2014 so that it’s equivalent to about 10 percent of the government’s annual tax revenue, or about $13.8 billion. Lawmakers sent Brown the spending plan Thursday evening.

The legislature also created two new piggy banks -- one seeded with $200 million that could be used to soften any social services cuts in a recession and another of about $2 billion that would house money before it’s moved to the rainy-day fund or used for other needs.

Of the $8.9 billion surplus, about half is going to various savings accounts, according to H.D. Palmer, a spokesman for Brown’s finance department.

Some Republicans, who are in the minority in both legislative houses, have chafed at the breadth of the surplus and reserves, saying some of the windfall should be returned to the populace through tax cuts.

"There’s something seriously wrong when Californians are financially underwater but the government is rolling in cash,” said John Cox, the Republican contender to replace Brown, in an emailed statement.

But Wall Street likes reserves, especially for California, which is prone to boom and bust cycles because of its reliance on taxing wealthy residents. S&P Global Ratings pointed to the creation of the rainy-day fund in 2015, when it lifted the state’s credit rating to the highest since 1999. Investors have also rewarded Brown’s approach and are trading California’s 10-year bonds almost as if they’re top-rated securities.

What could throw things off course is the impending change in the executive office. Bond managers haven’t heard specifics on how Brown’s potential successor, Cox or Democratic Lieutenant Governor Gavin Newsom, would keep finances on an even keel in a recession. (Newsom supports fully filling the rainy-day fund, his spokesman Nathan Click said.)

Even if the next governor won’t continue Brown’s fiscal discipline, as some investors fear, he would at least have a well-stocked rainy-day fund that could minimize the shock in the next downturn.

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