State’s Tiny Piggy Bank

Though it enjoys the most boisterous economy of any state, California still is one of the stingiest when it comes to saving for the proverbial rainy day. As the Legislature adopts the state’s 1998-99 budget, it should consider a substantial boost in the $296 million Gov. Pete Wilson has proposed for the so-called reserve for economic uncertainties.

In New York, the overlords of public finance, the big bond rating agencies, recommend that a state put aside at least 3% of its general fund budget each year to guard against a downturn or to absorb the costs of a major natural disaster. Wilson has budgeted just a little more than one-half of 1% in the new budget.

Experts can argue, as those in the state Department of Finance do, that 3% is far more than is necessary in a booming, diverse state like California. But it makes sense to set aside a prudent reserve when the revenue is available, as it is now. A fraction of 1% seems less than wise in a state that is so frequently battered by disaster.

A state’s ability to deal with unexpected fiscal problems is one of the factors weighed by the three major New York bond houses when they rate ability to pay off bonds over 20 or 30 years. The higher the rating, the less interest a state has to pay on bonds.

Typically, bond issues are floated to finance capital construction projects such as schools or prisons. California’s pre-recession bond rating was a platinum-lined AAA. But it fell to A-plus during the recession. Of the three bond houses--Moody’s, Standard & Poor’s and Fitch--only Fitch has since raised California bonds, to an AA rating. State Finance Director Craig L. Brown has appealed to Moody’s and S&P; to boost their California rating, and he hopes that will occur before a big bond sale later this month.

Wilson’s finance experts were startled when they heard a Moody’s expert lump California with New York and Louisiana as the three states least able to weather another recession. They argued that California cannot be compared with Louisiana in any manner and that our state is fiscally sounder than New York state, which has far higher bonded debt. Certainly the California economy is much more stable and diversified now than before the recession, when it was largely dependent on the defense and aerospace industries.

Job growth is the best hedge against any fiscal setback, the experts say. But even a modest economic flattening could eat up a $296-million reserve in just a few months. Some experts fear the recent financial troubles in Asia might do just that.

As El Nino rains fall on California, the Legislature should consider a more prudent rainy-day--or earthquake or wildfire--fund.