Tuesday, March 28, 2017

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Budget Gimmickry Goes from Bad to Worse

Earlier this week, Moody’s downgraded New Jersey’s credit outlook from “stable” to “negative” in light of, as the rating agency put it, “the persistent and growing structural imbalance exacerbated by nonrecurring and temporary budgetary solutions.”

Moody’s writes, “The depletion of the state’s rainy day fund, enactment of temporary tax increases and significant reliance on nonrecurring expenditure reductions including minimal pension contributions contribute to both short-term and longer term budgetary pressures resulting in the state’s negative outlook.”

In other words, Wall Street sees right through the budget gimmickry that, while especially prevalent this year, has been a feature of New Jersey’s budget process for two decades. Budget tricks may fool voters, but they’re less likely to fool creditors. And many of the stopgap measures used to balance this year’s budget will not be available next year.

But New Jersey looks positively restrained compared with this new scheme from California, which arguably leads the nation in creative intergovernmental lending:

The cash-strapped University of California plans to loan $200 million to the even more cash-strapped State of California so that—get this—the state can give the money back to UC.

Here’s how we got to this crazy place: First, California’s enormous budget deficit sent the state’s credit rating into a death spiral and prompted massive cuts to a vast array of state-funded enterprises, including UC. The state cut UC’s budget by $813 million, prompting the university to raise student fees, furlough faculty and enact a range of other painful cost-cutting measures. But as bad as things are for UC, the university has managed to maintain a better credit rating than the state. Which means it can borrow money at a low interest rate and loan it to the state at a somewhat higher rate.

Here’s the story from the San Francisco Chronicle.