California’s economic stability leaves Gov. Brown a new challenge

SACRAMENTO — Soon after Jerry Brown was elected governor in 2010, he invited the state’s top budget official, Ana Matosantos, to lunch at his office. He had just two months to prepare his first plan for tackling California’s $26-billion deficit.

He asked his assistant to fetch the budget director a sandwich. Then, Matosantos said, the incoming governor of one of the world’s largest economies ate a single hard-boiled egg, sprinkled with salt.

Brown’s dietary discipline was a hint of the regimented approach he would take to California’s staggering financial problems, which he had promised to fix by pushing the state back into the black.

“I don’t go to the theater. I don’t golf. This is what I do,” Brown told Matosantos.

For previous governors, California’s budget was quicksand. Gray Davis, a fellow Democrat, was recalled by voters as state finances imploded following an energy crisis. Republican Arnold Schwarzenegger limped out of office with rock-bottom poll numbers, leaving a pile of debt.

But on Brown’s watch, deficits have become surpluses, helped along by tax hikes the governor persuaded voters to approve. More money is being pumped into schools. University tuition has stabilized.

Budget standoffs that once dragged through the summer are now wrapped up by the June deadline, lending the Capitol a new sense of orderliness. And on Wednesday, the governor called a special legislative session to prod lawmakers to pass his plan for saving money and paying off debt.

That record, which will be a major part of Brown’s reelection campaign, is due partly to good fortune. California is benefiting from a nationwide economic recovery that has helped flood the state with revenue. Brown is also blessed with a Capitol dominated by fellow Democrats and a 2010 rule change that lowered the number of votes needed to pass a spending plan.

“Somehow he managed to get all the stars aligned,” said Norton Francis, who studies state finances at the Tax Policy Center in Washington, D.C.

But California’s finances remain vulnerable in some ways, as Brown’s main challengers in the June primary — Republicans Neel Kashkari, a former U.S. Treasury official, and state Assemblyman Tim Donnelly of Twin Peaks in San Bernardino County — have noted.

Brown keeps pushing for a $68-billion bullet train whose funding is in dispute. And although some debts are being repaid, others are growing as the state fails to allocate enough money for long-term funding of teacher pensions and healthcare for retired state workers.

The governor has acknowledged the gap. “By no means are we out of the wilderness yet,” he said in January, although he has not detailed any plans to address those ballooning costs.

When Brown was inaugurated in January 2011, California was a punch line for jokes about government dysfunction. The state had $35 billion in debt — equivalent to more than one-third of general fund spending — that it had accumulated by borrowing money and delaying payments when it was short on cash.

Brown warned then that there would be more pain ahead.

“Choices have to be made and difficult decisions taken,” the septuagenarian governor said in a speech when he was sworn in. “At this stage of my life, I have not come here to embrace delay or denial.”

Unlike Schwarzenegger, Brown did not convene blue-ribbon panels to recommend ways to overhaul California’s finances — ideas that mostly went nowhere. But like his predecessor, he cut aid to the needy.

Providers in the state’s healthcare program for the poor are now paid less. Welfare payments are lower, and fewer families receive state-subsidized child care.

The governor’s decisions paved the way for his 2012 tax-hike campaign, a defining moment of his term.

Brown had promised to seek voters’ blessing before raising taxes, but he failed to win the needed Republican support to put the issue on the ballot. So he used the initiative process, asking Californians to increase income taxes on high earners for seven years and raise the sales tax for four years.

That would generate an estimated $6 billion annually, the governor said. Without it, billions of dollars would be cut from schools.

Voters approved Brown’s proposal by a nearly 11-point margin. Within two months, Wall Street analysts at Standard & Poor’s had upgraded the state’s credit rating — still one of the worst in the country, but no longer dead last.

The financial stability has brought a new political challenge for Brown — keeping spending in check while Democrats push for more money for social services.

Lawmakers were able to squeeze enough from Brown in 2013 to restore dental care for poor adults and increase university tuition assistance for middle-class families. But it was less than Democrats wanted, and they have chafed under the governor’s resistance.

Senate Budget Chairman Mark Leno (D-San Francisco) said he tangled with Brown on the issue.

“The demands are so many and so great and so real,” Leno said.

Republicans express disappointment over the spending increases but praise the governor’s moderate approach — he’s the adult in the room, they say, when it comes to budget negotiations with Democratic lawmakers.

“He actually sounds like a Republican,” said state Senate minority leader Robert Huff (R-Diamond Bar).

Democratic legislative leaders also have echoed some of Brown’s calls for fiscal discipline, and they’re working with the governor to build a financial reserve to cushion the state against economic downturns.

A stronger rainy day fund is needed, Brown says, because California’s tax system leaves the state vulnerable to swings in the economy. The budget depends heavily on taxing the wealthy, whose incomes rise and fall with the stock market.

Brown wants to capture revenue from capital gains taxes once they exceed a certain level. His plan would require the excess to be stashed away for hard times or used to pay debt and cover such costs as public pensions.

He will need some Republican support for the proposal now that his fellow Democrats have lost their supermajority in the state Senate, because the measure requires a two-thirds vote to pass the Legislature and be placed on the statewide ballot.

Even though California’s annual budget deficits may have faded, the state’s long-term obligations are enormous — calculated by Brown’s administration at $354.5 billion more than officials have set aside. That’s more than double all annual state spending.

The largest of these costs is retirement benefits for public employees, which are underfunded by $218 billion, according to administration figures.

Kashkari said such problems show that Brown has not done enough to fix California’s finances.

“It’s like saying, ‘I balanced my checkbook; I’m a hero,’” Kashkari said in an interview. “But you still have a giant mortgage you can’t afford.”

Donnelly went further, saying in a statement: “Jerry Brown has put the solvency of California, and the economic security of every Californian, in jeopardy.”

Brown signed legislation two years ago reducing pension benefits for new public employees, but bigger changes were opposed by Democratic lawmakers and powerful labor unions and did not make it through the Legislature.

Meanwhile, retirement costs continue to grow — the state has paid $4.5 billion less than necessary to keep the teacher pension fund healthy, for example.

The lower payments make it easier to balance the budget each year, but the state will end up owing more down the line.

Brown’s defenders say he can’t do everything at once, and tackling these issues would have distracted from the immediate task of pulling the state out of its persistent financial crisis.

“Wisely, he takes big challenges one at a time,” said Treasurer Bill Lockyer, a Democratic former Senate leader and a veteran of Sacramento’s budget battles. “He tries to actually get something done.”

chris.megerian@latimes.com