California’s fake reforms yield credit upgrade

In January, Standard and Poor’s upgraded California’s credit rating to A from A-, an action the rating agency said resulted from the state’s “improved fiscal condition.”

Ted Dabrowski
Vice President of Policy
Follow on Twitter

John Klingner
Public Policy Research Assistant

In January, Standard and Poor’s upgraded California’s credit rating to A from A-, an action the rating agency said resulted from the state’s “improved fiscal condition.”

At first glance, California seems to be moving in the opposite direction of Illinois. California’s upgrade came only a week after Illinois’ downgrade to A- from A. Illinois now has the lowest credit rating of any state from both S&P and Moody’s.

And with Illinois’ political deadlock over pension reform and its recent failed bond issue, it may be tempting to look to California for ideas.

But Illinoisans shouldn’t be fooled; California’s day of reckoning has only been postponed. The state still faces enormous fiscal problems that Sacramento politicians refuse to address.

California’s recent pension “fix” was no more than a band-aid; the state didn’’t implement Gov. Brown’s proposals to include 401k-style plans as part of the solution and most of the savings won’t be felt for decades.

California failed to make a sizable dent in its $370 billion unfunded liability and its tab for pension costs will continue to swell.

Rather than reform pensions or spending, politicians chose to enact a $7 billion tax increase on Californians. They doubled down on higher tax rates for entrepreneurs and small businesses. The “temporary” increase added three new tax brackets on those making more than $250,000. Now, a small business owner beginning to see success will be subject to a marginal tax rate of over 10.3 percent to a maximum of 13.3 percent.

California’s tax hike will only accelerate the current exodus of taxpayers from the state. Small businesses, entrepreneurs, and wealthy individuals such as golfer Phil Mickelson will continue to move to other states that do not tax success so prohibitively.

California’s fake reforms and massive tax increase have allowed the state’s politicians to declare victory over its fiscal issues. With the coffers full for now, the impetus for long-lasting reforms has faded, deflating pressure on politicians to act.

S&P’s California rating is not a sign of confidence nor is it signal that California implemented good policy. It only says that the tax hike has fulfilled its goal of plugging California’s fiscal gap for a short time – and even that’s being questioned.

Illinois is desperate to end its fiscal crisis, but it shouldn’t follow the California model of fake reform. Instead, Illinois should look the other way for real reform and bold action. Michigan and Indiana have taken on the unions to pass right-to-work laws. Wisconsin passed collective bargaining reforms that allowed it to balance its budget. Rhode Island has added 401k-style plans that give workers more control over their retirements.

S&P may have been taken in by California’s moves, but Illinoisan’s shouldn’t. Falling for such tricks will only keep Illinois trapped in its death spiral.