In its most optimistic budget forecast in more than a decade, the Legislature’s fiscal analyst said Wednesday that California is poised for years of multibillion-dollar surpluses.
However, even a moderate economic downturn could throw the state back into deficit, the nonpartisan Legislative Analyst’s Office said. The analyst projected a $5.6 billion surplus by June 2015 and urged lawmakers to hold much of it in reserve.
The fiscal outlook is a prelude to annual budget negotiations at the Capitol, where the expectation of a surplus will foist pressure on Democratic lawmakers to increase spending in budget talks next year. Many social service advocates limped out of the recession desperate to restore or expand programs for California’s poorest and neediest residents, and despite modest spending increases many of their funding requests remain unfulfilled.
“There were many things cut that need to be restored,” said Anthony Wright, director of the nonprofit advocacy group Health Access California. “We had cut the safety net beyond the pale. ... We started to restore this past year, but only at the margins, and more needs to be done.”
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Gov. Jerry Brown, a Democrat, has sought in recent weeks to temper spending expectations ahead of the release of his spending plan in January. His administration continued to urge caution Wednesday.
“Recent history reminds us painfully of what happens when the state makes ongoing spending commitments based on what turn out to be one-time spikes in capital gains,” Michael Cohen, Brown’s director of finance, said in a prepared statement. “We’re pleased that the analyst’s report shares the governor’s view that discipline remains the right course of action. The focus must continue to be on paying down the state’s accumulated budgetary debt and maintaining a prudent reserve to ensure that we do not return to the days of $26 billion deficits.”
The legislative analyst’s report was its second-straight positive review of California’s financial outlook after years of red-ink warnings. Mac Taylor, the legislative analyst, said an improving economy, increased tax collections and spending restraint by the Legislature have left the state’s budget forecast even more promising than a year ago.
Yet Taylor said in the report, “Despite the large surplus that we project over the forecast period, the state’s continued fiscal recovery is dependent on a number of assumptions that may not come to pass.”
Taylor projected annual operating surpluses to reach $8.3 billion by the 2016-17 budget year, then grow more slowly as tax increases from Proposition 30, Brown’s ballot initiative last year to raise income and sales taxes, phase out.
The impact will be felt over several years, and Taylor told reporters “you don’t have one really dramatic year in which revenues fall off.”
The revenue forecast remains highly dependent on capital gains, a significant but volatile source of state revenue. Taylor said an economic slowdown could impact growth but that the financial market “is not out of line like it was in the dot-com boom.”
Jeff Cummins, a political science professor at California State University, Fresno, said the analyst’s report reflects a “vast improvement” in California’s financial standing. But he said the forecast “makes the outlook seem rosier than it really is” because it does not account for tens of billions of dollars in unfunded retirement and health care obligations.
In the short-term, Cummins said, “I think it’s going to be very difficult for (lawmakers) to resist expanding programs and creating new programs, because that’s what their natural tendency is.”
One factor contributing to the projected surplus is a source of revenue the state doesn’t even collect: property taxes. Property-tax revenue, a major part of local government budgets, is on the rise as the state housing market recovers from the Great Recession, Taylor said.
The extra money reduces the state general fund’s obligation to schools and community colleges, which receive a slice of local property tax revenue. So while California’s school-funding guarantee is projected to increase by $5.6 billion by June 2020, the general fund’s share would be only $1.7 billion of that, according to the analyst’s projections.
Taylor said his office expects home prices to increase 7 percent in 2014. Home construction also is on pace to return to pre-recession levels, he said.
School officials said finances look to be on their firmest footing in years. Like social service advocates, they already are suggesting ways to spend the extra money.
Kevin Gordon, a lobbyist who represents districts around the state, said lawmakers should target the extra money at the revamped funding formula championed by Brown and approved last summer.
Under the current budget, more money for schools phases in an increase over eight years. Gordon said the phase-in should be accelerated to make up ground before another recession hits.
“It gives us a greater potential to actually realize the reform,” Gordon said.
Wednesday’s report comes almost a decade after voters approved $15 billion in budget borrowing championed by then-Gov. Arnold Schwarzenegger and Democratic leaders after the dot-com bust as an alternative to large tax increases or spending cuts. Taylor said the state has almost paid off the debt, freeing up $1.6 billion a year after 2016-17.
Taylor warned that the borrowing, along with other budget maneuvers during the bad years, shouldn’t be repeated.
“When you do something you shouldn’t do, like paying for operating expenses with bond financing, debt financing, it has repercussions over many, many years,” Taylor said. “And it’s something you want to try to avoid in the future at all costs.”
In a statement, Assembly Speaker John A. Pérez, D-Los Angeles, said the Legislature must “maintain the fiscal prudence that put us in this favorable position,” while Senate Republican Leader Bob Huff, R-Diamond Bar, said there will be “pent-up spending demands by many that can’t be fulfilled.”
“The LAO recommends a cautious approach of building a strong rainy-day reserve, paying for past commitments, and limited ramp-up of new spending,” Huff said in a statement. “We agree.”
Sen. Holly Mitchell, a Los Angeles Democrat who pushed with mixed results for a funding increase for CalWORKs grants while in the Assembly this year, called the surplus an “opportunity to do all that we need to do.”
“Make sure that we have some money to pay down debt, make sure that we have some money to put in savings,” she said, “and also make sure that we look to expand some of the critical, critical programs that have suffered disproportionately here in the state over the last 10 years.”
Mitchell added, “There really are resources to do all three.”