Capitol Alert

Analyst predicts strong economy, more California budget surpluses

Last November, Legislative Analyst Mac Taylor looks through his office's November 2014 fiscal outlook report. The Legislative Analyst’s Office released its outlook for 2016-17 and beyond Wednesday.
Last November, Legislative Analyst Mac Taylor looks through his office's November 2014 fiscal outlook report. The Legislative Analyst’s Office released its outlook for 2016-17 and beyond Wednesday. AP

California’s economic engine will continue to hum in the coming years, allowing the state to ring up a series of multibillion-dollar budget surpluses and build rainy-day reserves, the Legislature’s nonpartisan fiscal analyst projected Wednesday.

The upbeat assessment of state finances by the Legislative Analyst’s Office moves the state further beyond the up-and-down budgets of the 1990s and 2000s and the deep recession-era shortfalls of several years ago. The projections, though, could complicate efforts by multiple trade organizations, unions and other interests to qualify November 2016 ballot measures that impose billions of dollars in new taxes.

Doctors and the largest health care workers union have been cleared to collect signatures to qualify a measure to raise tobacco taxes. Two other proposals would continue versions of the Proposition 30 income tax increases passed three years ago to pay for school and health care programs. And various nonprofits have started circulating petitions to qualify a measure imposing a tax surcharge on multimillion-dollar properties to pay for anti-poverty efforts.

Bill Carrick, a consultant working with the nonprofit coalition, said the estimated 2 million children living in poverty in California show the need for more money. He did not think the improved state budget numbers would have an effect on the proposal, which would raise an estimated $7.7 billion.

“We need to focus directly on poverty itself, and bring to bear resources on that, and turn away a deteriorating reality for too many California families,” Carrick said.

At the Capitol, the higher revenue projections could complicate efforts by legislative Democrats and Gov. Jerry Brown to get necessary Republican votes for a revised tax on health plans to help pay for Medi-Cal. The tax is the focus of a legislative special session on health care.

“Even in the absence of Proposition 30 taxes, this strong revenue growth shows that it won’t be necessary to impose new taxes on California families,” Senate GOP Leader Jean Fuller, R-Bakersfield, said in a statement.

$113.3 billion 2015-16 income, sales and corporation tax revenue estimated in June budget

$116.8 billion 2015-16 income, sales, and corporation tax revenue estimated in Wednesday’s LAO fiscal outlook

The November fiscal outlook, an early milestone in the annual budget process, reflects the analyst’s best guess of the state’s finances over several years. Wednesday’s report notes that the nation’s post-recession economic expansion, already the fifth longest in history, could stall by the end of the decade.

Under a scenario deemed most likely, though, the state would end the next several fiscal years with anywhere from $3.2 billion to $18.2 billion left over. And when the economy does flatten, lawmakers will be able to tap billions of dollars that have been socked away into a voter-approved rainy-day reserve that would help offset any spending cuts, even during a recession.

The state budget “is better prepared for an economic downturn than it has been at any point in decades,” Wednesday’s report said.

“This is a very positive situation,” Legislative Analyst Mac Taylor said in an interview. Lawmakers can take a cautious approach and avoid new spending commitments, he said. Or they can approve new spending and the budget reserves would buy the state time to avoid cuts if the economy weakens.

According to the analyst’s office, the state will end the current fiscal year in June with $7.9 billion in reserves, $3.3 billion more than lawmakers expected when they approved the budget for the current year last June. And the state would have reserves of $11.5 billion in June 2017, the end of the 2016-17 budget year, barring any new budget commitments.

Of the surplus for 2016-17, about two-thirds would go into the voter-approved rainy-day reserve and could be spent only on emergencies. Lawmakers, though, could decide how to spend the remaining $4.3 billion.

Total Medi-Cal enrollment in June 2015 was about 11 percent higher than in June 2014.

As has been the case in recent years, the analyst’s office’s revenue projections are higher than those by the Brown administration. The prospect of greater-than-expected revenue already has prompted calls by some health and welfare groups for increased spending on social service and health programs.

Advocates for the poor want the state to raise the state’s contribution to the federal-state supplemental income payments to the elderly, blind or disabled. Supporters of services for the developmentally disabled say some of the money should go to restore recession-era cuts to the program, a focus of the Legislature’s health care special session.

“We need to get out of this austerity mentality of constraints and realize that we have an opportunity for progress now,” said Laphonza Butler, president of SEIU California and SEIU Local 2015. The union’s members include health care and school workers, and the union is among the organizations backing a proposed ballot measure to extend higher taxes on wealthy residents.

Taylor noted that accurately projecting the state’s fiscal landscape through the decade’s end becomes more difficult after the 2016-17 fiscal year, and his office offered several alternative economic scenarios. In one, a recession hitting in the 2017-18 fiscal year would cause state revenues to drop by more than $60 billion. Even then, there would be enough reserves to cover projected budget shortfalls through June 2018.

“The strong economy is good news for California, but the recession scenario outlined by the Legislative Analyst is a sobering reminder that we must continue to pursue fiscal discipline, pay down liabilities, and build up our Rainy Day Fund during these fleeting good times,” Michael Cohen, the director of Brown’s Department of Finance, said in a statement.

The outlook predicts that the gradual phase-out of the Proposition 30 taxes means there would be little impact on finances if the state economy continues to grow.

The sales tax hike included in Proposition 30, 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 on high-income residents will lift at the end of the 2018 tax year.