NBLC Policy Watch: California’s Fiscal Outlook Remains Positive

The California Legislative Analyst (LAO) has prepared his Fiscal Outlook for the Budget Year 2014-2015.

The LAO found that “Under Current Policies, $5.6 Billion Projected Reserve at End of 2014-15. The state’s 2013-14 budget plan assumed a year-end reserve of $1.1 billion.

“Our revenue forecast now anticipates $6.4 billion in higher revenues for 2012-13 and 2013-14 combined,” the LAO said.”These higher revenues are offset by $5 billion in increased expenditures, almost entirely due to greater required spending for schools and community colleges. Combined with a projected $3.2 billion operating surplus for the state in 2014-15, these factors lead us to project that, absent any changes to current laws and policies, the state would end 2014-15 with a $5.6 billion reserve.”

The LAO said, “We assume continued economic growth in future years. In such a scenario, we project that, under current laws and policies, state General Fund revenues will grow faster than expenditures through 2017-18, when the state’s projected operating surpluses reach $9.6 billion. The state’s temporary personal income tax rate increases under Proposition 30 (2012) expire at the end of 2018, resulting in a more gradual ramping down of these revenues over the last two fiscal years of our forecast. This helps prevent a ‘cliff effect’ in our forecast, as our projected operating surpluses remain stable at just under $10 billion per year in 2018-19 and 2019-20.”

There was more good news for the state given the healthy local property tax growth.

The LAO said, “Proposition 98 funding for schools and community colleges is provided by a combination of state General Fund spending and local property tax revenues. Throughout our forecast, healthy property tax growth — a byproduct of the recovering housing market — helps moderate the growth of required state General Fund spending on schools and community colleges. In addition to normal property tax growth, the state’s fiscal situation is helped by additional increases in school property taxes due to the dissolution of redevelopment agencies. … Both of these factors play a significant role in keeping annual state expenditure growth below revenue growth for much of our forecast period.”

The LAO urged continued caution noting that “the state’s continued fiscal recovery is dependent on a number of assumptions that may not come to pass. For example, our forecast assumes continuing economic growth and slow, but steady, growth in stock prices. As we discuss in this forecast, an economic downturn within the next few years could quickly result in a return to operating deficits. Further, the normal volatility of capital gains could depress (or boost) annual revenues by billions of dollars. In addition, our forecast assumes that the state repays liabilities with payment schedules set in current law. Other liabilities, including some items on the Governor’s wall of debt and the state’s huge retirement liabilities (particularly those related to the California State Teachers’ Retirement System), remain unpaid under our forecast. If additional payments are made in the future to repay these liabilities or to provide inflation adjustments to universities, the courts, state employees, and other programs, the operating surpluses in our forecast would fall significantly below our projections.”

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Cynthia Murray is the president and CEO of the North Bay Leadership Council. PolicyWatch is published regularly by the NBLC. You can sign up to receive the full report atnorthbayleadership.org. Email Cynthia at cmurray@northbayleadership.org or call 707-283-0028. The full report is available at lao.ca.gov.