UPDATE 2-California Governor Brown stands by 2014 budget surplus

Tue May 14, 2013 7:55pm EDT

Related Topics

* Spending budget revised down from January plan

* Tax receipt windfalls for 2013 go to education

* Education plan can still create possible tension

By Jim Christie

SACRAMENTO, Calif., May 14 (Reuters) - California remains on track to post its first budget surplus in more than a decade, Governor Jerry Brown said on Tuesday as he warned lawmakers against loosening the purse strings in a state he called "a big spending machine."

In his revised plan for the fiscal year beginning in July, Brown left California's projected budget surplus at $850 million despite recent buoyant personal income tax receipts.

Concerned that income tax receipts would fall, Brown even reduced the proposed general fund spending to $96.4 billion, or 1.3 percent below the $97.7 billion planned in January. Even with the reduction, spending would increase from this year's $95.7 billion.

"This is not the time to break out the champagne," said Brown, a Democrat, adding that, "For the first time in more than a decade we have a balanced budget, and it's solid."

California has the ninth-largest economy in the world but its history of multibillion deficits and accounting gimmicks left it until recently with the lowest bond rating of any state. A pickup in the economy, spending cuts over the past two years and tax hikes have helped California bolster its finances and its standing with rating agencies in the municipal bond market.

Brown's revised plan assumes a relatively tepid economy even after a surge in revenue in April.

The plan cuts expectations for personal income growth to 2.2 percent from 4.3 percent as a result of spending cuts by the federal government in January and the effect of automatic federal cuts known as sequestration.

Brown's new plan follows a report by the state controller that said strong April tax receipts put California's revenue since the start of its current fiscal year $4.6 billion above estimates in the governor's January budget plan.

Much of the increase came from voter-approved income tax hikes on the wealthy in November that were retroactive to last year, and an increase in federal taxes that spurred investors to sell assets. The windfall will mostly go to education as required by law.

Schools and community colleges will receive an additional $2.9 billion in the current fiscal year. But their funding would decline by more than $900 million in the next fiscal year to $55.3 billion.

Brown pressed on with his campaign to restrain spending, ignoring demands by some fellow Democrats who control the legislature to restore spending in various areas.

"All these institutions - courts, hospitals, universities - their costs are going up. And everybody's got to find a way to manage it. There's a reason this budget was always in deficit - because there are a lot of needs out there and a lot of articulate people advocating for them," Brown said.

"Everybody needs more spending. That's what this place is, it's a big spending machine," he added.

'VERY SOBER' PLAN

State Assembly Speaker John Perez told reporters he is in agreement with most parts of Brown's revised plan, but he foresees possible tension between some lawmakers and the governor over his plan for allocating education money.

"In broad terms, we're in the same place," Perez said, adding that the legislature would meet its mid-June deadline for approving a budget so Brown can sign one into law by the July 1 start of the new fiscal year.

After Brown in January proposed his initial budget plan with a surprise surplus, Standard & Poor's Ratings Service raised its credit rating on California's general obligation debt by one notch to A from A-minus. That left Illinois as S&P's lowest-rated state at A-minus and lowered California's borrowing cost on the $3.7 trillion municipal bond market.

Brown's revised budget plan forecasts a $484 million decline in California's cost of borrowing on short- and long-term debt "made possible by the state's improved fiscal condition."

S&P analyst Gabriel Petek said Brown's revised plan is a "favorable proposal from a credit standpoint." He added that the governor is taking a "realistic approach" to the state's revenue, which can be volatile as it relies so much on the personal income taxes on the wealthy.

Fitch Ratings analyst Douglas Offerman said it may be a few weeks before his rating agency responds to Brown's "very sober" plan. Fitch rates California's general obligation debt A-minus with a positive outlook.

Lawmakers would do well to heed Brown's caution regarding the state's revenue, said Steven Frates, head of research at the Davenport Institute at Pepperdine University's School of Public Policy. "The governor, if you will, is forced to be prudent," he said. "It's clear the national economy is not very robust."

While the most populous U.S. state is recovering from the recession and financial crisis, it has 9.4 percent unemployment, one of the nation's worst jobless rates.

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