California will collect more than $3 billion in additional state revenue, the state's nonpartisan legislative analyst said Friday, setting the stage for a Capitol fight among Democrats over spending.
Legislative Analyst Mac Taylor's prediction of higher state revenue in the next fiscal year was due largely to sharp recent increases in the stock market and to differences with the Governor's Office in projecting California's near-term economic prospects.
Because current state law would require the vast majority of any windfall to go to public schools, Taylor also proposed an alternative that lawmakers could use to free up billions for other uses.
"Great for schools, that's a good thing," Taylor said of the current formula. "Not so good for the rest of the budget and the Legislature trying to balance its varying priorities. We'd encourage them to just take another look at that issue."
The Capitol is brimming with proposals for boosting spending on public services, including courts, mental health facilities, child care, middle-class scholarships, adult dental programs and Medi-Cal provider rates.
Legislative leaders reacted cautiously Friday to Taylor's rosier estimates.
Assembly Speaker John A. Pérez, in a written statement, said that the new projections are consistent with his own expectations.
"No one should interpret these figures as an automatic green light to increase spending, but rather to pay off debt, build the reserve and strengthen the middle class key principles of our (Assembly budget blueprint)," Perez said.
Senate GOP leader Bob Huff of Diamond Bar said he expects a big push by social service advocates to bolster services after years of budget crisis.
"There's a lot of pent-up demand to grow programs," he said. "But this is not a time to take out the checkbook and start writing checks."
Taylor anticipates $3.2 billion more in state revenue than was pegged by Gov. Jerry Brown in his revised budget proposal released Tuesday. The two agree, however, that revenue projections are volatile and that the state should be cautious about making new long-term spending commitments.
"We dug out of a big, deep hole," Taylor said of California's multiyear budget crisis. "And the last thing we want to do is start another one."
Taylor's report said "this is an ideal time" for the Legislature to begin addressing its retirement liabilities or to strengthen its rainy-day fund.
H.D. Palmer, spokesman for the state Finance Department, defended the governor's more conservative revenue projections.
Brown, in his latest budget plan, allocated nearly all windfall revenue to public education. Schools were targeted to receive $2.9 billion more next year. The total does not reflect the additional $3.2 billion cited by Taylor.
Roughly 80 percent of the difference in revenue estimates is due to capital gains, which is "the most volatile revenue source and is subject to dramatic swings," Palmer said.
Brown also opposes Taylor's proposal to alter the Proposition 98 formula for distributing new state revenue to schools in times, such as this, when money is owed from years past, according to Palmer.
Under Taylor's approach, the state would repay all money owed to schools but at a slower rate than currently required. A change in formula could be enacted by the Legislature and governor, the legislative analyst contends.
"If the analyst desires for the state to take a different approach, an affirmative vote of the people to amend the constitution would be necessary," Palmer said.
Absent any change in the formula, about $2.4 billion of the $3.2 billion in new revenue would go to schools, Taylor said.
Vanessa Aramayo, director of California Partnership, a coalition seeking to bolster the state's safety net, said the governor seems to be "playing games by lowballing the projections."
The state would benefit if lawmakers seize the opportunity to boost programs for disadvantaged Californians, she said. "We can use that money to truly grow the economy by lifting people out of poverty and investing in all Californians," she said.
Anthony Wright, director of Health Access, a nonprofit consumer advocacy group, said the state should make it a priority to restore Medi-Cal adult dental benefits and to kill a planned 10 percent cut in Medi-Cal provider rates. Both moves would qualify the state for federal funds as well, he said.
"There's a need to be frugal, but being economically conservative also means taking advantage of money that's available," he said.
Kevin Gordon, a veteran lobbyist for schools, said that reneging on the formula for repaying money owed to schools would threaten school reform and "jeopardize any kind of trust the education community would have in lawmakers and the governor."
"I don't think the public would sit still for the idea that there are people in Sacramento concocting ways to get around the basic intent of ensuring that schools get what they're owed," he said.
Sen. Bill Emmerson of Hemet, a Republican who serves as GOP point man on budget issues, said that lawmakers made a commitment last year when the Proposition 30 tax increase was passed.
"We should keep the promise made to voters that any new revenue would go to our schools," Emmerson said in a written statement.
The Legislative Analyst Office's economic projections differ from those of Gov. Jerry Brown's Department of Finance in a few key ways:
CAPITAL GAINS: 2012 gains came in higher than expected, and the LAO predicts the soaring stock prices already experienced will benefit state coffers. This makes up 80 percent of the difference between the two forecasts.
SEQUESTRATION: The LAO says federal cuts have not resulted in "substantial pullback" from business and consumer activity.
EMPLOYMENT: The LAO is banking on a slightly lower jobless rate than the Finance Department.
HOUSING: The LAO predicts about 11 percent more housing starts this year than Brown's administration.
RETAIL SALES: Brown's forecasters are more optimistic than the LAO in this category, predicting taxable sales will grow by 8 percent, compared with the LAO's 5 percent.
Call Jim Sanders, Bee Capitol Bureau, (916) 326-5538. Follow him on Twitter @jwsanders55.