Good news, California: Surplus is $2.4 billion Excess to top $2.4 billion, analyst's report predicts

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Sacramento --

For the first time in nearly a decade, California is collecting more revenue than it is spending and will finish the fiscal year with an extra $2.4 billion, according to a report released Wednesday by the Legislature's nonpartisan budget analyst.

The good news comes after an era that saw one of the worst budget crises in California history - the fiscal shortfall sank to $60 billion in the 2009-10 budget, the state controller mailed IOUs to vendors in 2009 and state lawmakers slashed programs year after year to make ends meet.

Now, thanks to the passage of Proposition 30 last year and the improving economy, California is looking at surpluses for the next six years - even after the temporary taxes under Prop. 30 expire, according to the Legislative Analyst's Office.

The legislative analyst projected surpluses of $2.4 billion by June 2014 and $5.6 billion by June 2015. Reserves are projected to continue growing to nearly $10 billion by June 2018.

The state will spend $96.2 billion for general fund services this year, which include public education, colleges and universities, prisons, and health and human services.

Legislative Analyst Mac Taylor said Prop. 30, which increased sales taxes through 2016 and personal income taxes on the wealthy through 2018, would not have the "fiscal cliff" effect that some feared.

$3.1 billion for schools

Under the analyst's projections, California schools will receive an additional $3.1 billion this school year.

"Despite the good news of the report ... we do caution the Legislature that things can change quickly," Taylor said.

The report noted that a relatively moderate economic downturn could result once again in operating deficits, even if the Legislature did not spend reserves from 2013-14 and 2014-15.

"We aren't predicting that kind of downturn in the very near future, but it is possible," Taylor said. "The last thing we would want the Legislature to do is be in the same shape it was in 2008 when we went into the great recession, when we had no reserves and an underlying budgetary problem."

Economy improving

Taylor said California's improving economy - buoyed by the pickup in housing prices and sales - contributed to the sunny outlook over the next six years.

Last year at this time, the legislative analyst projected that California would end the 2012-13 fiscal year with a $1.9 billion deficit. But instead, the state ended with a surplus estimated at $234 million. Likewise, this year's projected $2.4 billion surplus is higher than expected, due to an increase in capital gains and stock price growth.

"The state's budget has come a long way in the past three years," said state Director of Finance Michael Cohen. "Any additional revenue that materializes will be inextricably linked to capital gains - the state's most volatile revenue source. 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."

Pay off state's debt

Cohen said the focus should remain on paying off the state's debt and building a reserve to "ensure that we do not return to the days of $26 billion deficits."

Last year, Taylor cautioned Democratic lawmakers holding a supermajority in the Legislature that the focus should be on paying off debts and building a reserve, not restoring previously cut services. Assembly Speaker John Pérez, D-Los Angeles, said the legislative analyst's numbers reflect the fiscal restraint both houses and the governor have shown.

"While the surpluses and increased revenue projections are welcome after so many years of recession and deficit, our job now is to maintain the fiscal prudence that put us in this favorable position, while at the same time making smart use of one-time money and stronger revenues to reinvest in California families," Pérez said.

California Democrats held a supermajority periodically during the last legislative session and are awaiting results in a tight Assembly race in Southern California that would restore their two-thirds power in the 80-member Assembly.

Families still hurting

The Legislature reconvenes in January, when Democratic lawmakers will be faced with their commitment to fiscal restraint and their desire to restore social services that have hurt needy families.

"We have many families still affected by the housing crisis, seniors with economic insecurity and folks without jobs," said Assemblywoman Nancy Skinner, D-Berkeley. "While forecasts are good, we still have to be smart and prudent to avoid bust cycles - but it's wonderful after years of difficult economic decisions that we are in a position to reinvest in California."