Bloomberg News

California Budget Is ‘Significant’ Improvement, LAO Says

January 15, 2013

Governor Jerry Brown’s proposed budget is “commendable” for its emphasis on fiscal discipline, yet California still faces “daunting” choices, according to the state legislature’s nonpartisan fiscal analyst.

The economic recovery, earlier budgetary restraint and voter approval of temporary tax increases have bolstered state finances, the Legislative Analyst’s Office said yesterday in a report. Yet volatile tax revenue and the uncharted path of federal spending presents “risks,” it said.

“The governor’s emphasis on fiscal discipline and paying off the state’s accumulated budgetary debts is commendable, especially in light of the risks and pressures that the state still faces,” according to the report.

The governor, a 74-year-old Democrat, said last week that California is poised to end its next fiscal year with the first surplus in more than a decade as he released a spending plan that reflects the higher sales and income taxes that voters passed in November. The analyst’s office previously projected a $1.9 billion deficit, even after the levy increases. Brown’s fiscal 2014 budget estimates $851 million will be left over.

Brown’s proposal assumes more revenue from the elimination of local redevelopment agencies than the analyst’s office projected in November. It also reflects slower repayment of money taken from special state funds.

Revenue Pressures

“Uncertainty surrounding federal fiscal policy and the volatility inherent in our revenue system” may put pressure on funding, according to the report. It cited continuing debates in Washington over raising the nation’s debt limit and on dealing with automatic spending cuts.

Brown’s proposal and his estimates for future years won’t provide a sizable reserve by the end of fiscal 2017 and don’t address “huge” unfunded liabilities for the state teacher pension system and for the health benefits of retired public employees, according to the analyst’s report.

“As such, the state faces daunting budget choices even in a much-improved fiscal environment,” the analyst’s office said.

Californians in November granted Brown some of the highest tax rates in the U.S., at 7.5 percent on retail sales, and at 13.3 percent on incomes of $1 million or more.

Right Choices

“Living within our means, paying down debt, and strengthening education are the right policy choices for California,” H.D. Palmer, Brown’s finance spokesman, said yesterday by e-mail in response to the analyst’s report. “Given the potential risks to our forecast -- both from Washington and overseas -- fiscal restraint is a prudent insurance policy.”

The governor won the office in 2010 on a pledge to repair the crippled finances that plagued the most-populous U.S. state, after lawmakers papered over $200 billion of deficits.

The projected surplus contrasts with a $15.7 billion deficit that Brown and lawmakers had to fill in the current fiscal year and a record $42 billion in 2009. A political battle over how to erase that gap forced the state to issue $2.6 billion of IOUs to pay bills during the impasse.

California, with a gross state product of almost $1.96 trillion, has an economy bigger than Russia’s and Canada’s, as measured by each nation’s annual gross domestic product, or GDP.

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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