California runs risk of financial relapse, ratings agency says

A report from Standard & Poor's questions how sustainable California's recovery will be

When Gov. Jerry Brown released his latest budget proposal earlier this month, he said California's finances were balanced but remain precarious.

On Wednesday, a report from Wall Street ratings agency Standard & Poor's echoed the governor's concerns and questioned how sustainable California's recovery will be.

"California's finances are roaring back," the report said. "History would suggest, however, that any fiscal renaissance will be temporary."

If the stock market shifts from gains to losses, Standard & Poor's said, the budget could be dramatically affected because about half of the state's revenue comes from the wealthiest 1% in California.

That means lawmakers should treat surging revenue as a "temporary upswing" and "build a modest cushion for the next downturn while beginning to address its existing long-term commitments," the report said.

The analysis from Standard & Poor's, which upgraded California's credit rating in November, could provide ammunition for Brown when negotiating with lawmakers this year. The governor has sought to keep a leash on new spending commitments, while his fellow Democrats have pushed for more funding for social services to help people still reeling from the recession.

"Depending on the whim of a fickle stock market, any such service level expansions might be short-lived," the report said. "In our view, this approach would signal a reversal to past budget management practices" -- practices that previously resulted in deficits.

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