Capitol Alert

California revenue projected to exceed budget estimates by $2 billion

Legislative Analyst Mac Taylor looks through his office’s report on the state fiscal outlook as he responds to a question during a news conference in Sacramento on Wednesday. Taylor’s office released its report examining state revenue trends through 2019, the first year after Proposition 30 tax hikes expire.
Legislative Analyst Mac Taylor looks through his office’s report on the state fiscal outlook as he responds to a question during a news conference in Sacramento on Wednesday. Taylor’s office released its report examining state revenue trends through 2019, the first year after Proposition 30 tax hikes expire. The Associated Press

Barring a stock market slump that drags down the state’s economy, California budgets will run surpluses through the end of the decade even as temporary tax increases phase out over the coming years, the Legislature’s nonpartisan fiscal analyst said Wednesday.

The fiscal outlook by the Legislative Analyst’s Office also projects that the state will take in $2 billion more in revenue through June than lawmakers expected when they approved the current budget plan. All of the increase will be absorbed by the state’s voter-approved constitutional funding guarantee for schools and community colleges.

And the state is on pace to have $4.2 billion in reserves by June 2016 under Proposition 2, the rainy-day reserve passed by voters earlier this month. But up to $2.2 billion of that would not be covered by Proposition 2’s tight restrictions and could be tapped by lawmakers for new spending proposals in the fiscal year that begins July 1 – over and above spending increases included in the current budget.

A larger reserve would lessen the need for cuts if the state suffers another economic downturn, Legislative Analyst Mac Taylor said Wednesday. “We need to have as much money as possible built up,” he said. “We would discourage them from going too much into those reserves.”

Lawmakers, though, already seem to be looking at ways to spend at least some of the money. In a statement, Senate President Pro Tem Kevin de León said the Legislature needs to consider “making prudent and wise investments to continue building the state’s economic strength.”

“First and foremost, we need to be careful stewards of the state’s budget and take advantage of California’s continued economic growth and revenue stability by allocating resources where they are going to make the most difference for Californians – such as education, health care and infrastructure,” he said.

Wednesday’s report marks the third straight year of upbeat outlooks for the coming fiscal year after years of recession-era bad news. Offering a first take on the state’s economic and budgetary well-being, the forecast comes about seven weeks before Gov. Jerry Brown releases his proposed spending plan, which kicks off negotiations with the Democrat-controlled Legislature. Brown will release a revised plan in mid-May that reflects April tax receipts, with a final budget due June 15.

The coming budget will be the last to include the complete pieces of Proposition 30, the November 2012 ballot measure championed by Brown and other Democrats that imposed an income tax surcharge on high-income residents and raised the sales tax by one-quarter of 1 percent. The measure generates $6 billion to $7 billion annually for schools, local government and other programs.

The sales tax hike, which took effect in January 2013, is scheduled to expire at the end of 2016. And the income tax surcharges of 1 percent to 3 percent would conclude at the end of the 2018 tax year.

Superintendent of Public Instruction Tom Torlakson and other school interests have called for extending the higher taxes, either in the Legislature or by another ballot measure, to avoid cuts to schools and other programs.

Yet Wednesday’s forecast projects that both sales tax and income tax revenue will continue to grow as the Proposition 30 increases drop off. Sales tax revenue, for example, would increase from a projected $25.4 billion during the 2016-17 fiscal year to $28.4 billion in 2019-20. And the analyst’s office projects that income tax revenue would grow from $81.5 billion in 2017-18 to almost $84.1 billion in 2019-20.

Taylor noted that Proposition 30 will phase out over several years, avoiding a “harsh cliff effect,” while the California economy will be growing, more than offsetting the lost revenue. “It gives you time to adjust your budget as revenues fall away,” Taylor said.

The coming budget year also will mark the debut of the rainy-day reserve that passed with more than 69 percent of the vote.

The measure requires the state to save money for reserves and pay down debt. It requires that the state set aside 1.5 percent of general fund revenue along with spikes in capital gains revenue that exceed 8 percent general fund revenue. One-half of that would be put into the budget stabilization account and the rest would go to paying down what Brown has called the state’s “wall of debt.”

Yet the measure’s real-world effects will depend on how lawmakers approach pre-Proposition 2 reserves, which total about $2.2 billion.. It’s legally uncertain if those reserves are covered by this month’s measure. And complex, still-to-be-determined interplay between Proposition 2 and the school funding guarantee could swing Proposition 2’s reserve and debt requirements by as much as $1 billion, officials say.

The outlook offered cities and counties some good news. California likely will hit a revenue target to trigger additional money, an estimated $170 million, toward paying off $900 million in pre-2004 claims for unreimbursed state mandates. That is less than one-quarter of the $800 million that locals could receive under the trigger, but the analyst’s office expects that the school funding guarantee will absorb the rest.

“We knew it was unpredictable,” Jean Hurst of the California State Association of Counties said of the trigger money. She noted that local governments have already received $100 million in claim relief in the current budget.

Besides the mandate trigger, this year’s $152.3 billion spending plan created additional child-care slots and allocated more money to in-home services to cover workers’ overtime. It also directs an estimated $832 million in revenue from the state’s cap-and-trade program to reduce heat-trapping gases, with $250 million of that going to the project to build a high-speed rail system. And the plan included money to give 2 percent pay increases to most state employees, effective July 1.

Call Jim Miller, Bee Capitol Bureau, (916) 326-5521. Follow him on Twitter @jimmiller2.

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