California's Gov. Brown to take cautious tack on budget
SAN FRANCISCO Dec 20 (Reuters) - California Governor Jerry Brown is being peppered with requests from fellow Democrats in the legislature as he prepares his state budget plan, but they should not expect he will embark on a spending spree despite the state being flush with cash.
Brown may eventually support some spending increases, but the plan he will unveil no later than January 10 will take a cautious view of the state's improved revenue and emphasize using it to pay down debt and build reserves, said H.D. Palmer, his spokesman on fiscal matters.
"We are in a far better place than we were three years ago when the governor took office," Palmer said. "That said, we have to learn the lessons of the past."
Specifically, it's too risky to assume revenue fueled by taxes on income from capital gains, which accounts for nearly 7 percent of the state's revenue in its current fiscal year, will remain strong enough to allow California to avoid the shortfalls that plagued its finances in the past, Palmer said.
"Things could move the markets in the wrong direction," he said.
California's revenue from the start of its fiscal year in July through November was $627 million above forecast in the state's current budget.
With revenue improving, Democratic lawmakers say the state can afford to loosen its purse strings after several years of austerity. Their differences with Brown, however, are not so large as to set the stage for a budget brawl, analysts say.
They note that even as Assembly Speaker John Perez has rolled out a "budget blueprint" urging "prudent investments" in job training and early childhood and higher education, he also called for ensuring "fiscal stability." That requires "building the state's budget reserve," Perez said.
An aide to Senate President pro Tem Darrell Steinberg said Democrats in that chamber share the Assembly speaker's view.
Brown's budget architects plan on a $1.1 billion reserve in the current fiscal year, while the Legislative Analyst's Office, the state's budget watchdog agency, sees the potential for a $2.4 billion reserve, largely due to the stock market fueling revenue from capital gains.
The reserve could reach $5.6 billion by the end of the next fiscal year if there is no change to the state's fiscal policies, the Legislative Analyst's Office added.
Personal income taxes provide California with its biggest source of revenue and the state's wealthiest taxpayers provide much of it. They face higher personal income tax rates approved by voters last year at Brown's urging.
"The data that we have to date suggest that high-income earners in California are having a very good year," said Jason Sisney, an analyst at the Legislative Analyst's Office.
While Democratic lawmakers would like to restore spending that Brown and his Republican predecessor Arnold Schwarzenegger pressed them to cut to balance budgets when revenue slumped, they won't press too hard in an election year. They risk losing seats to Republicans who are largely in tune with Brown on paying down debt and building reserves, analysts say.
"Unless the legislature continues to embrace Governor Brown's call for fiscal restraint, we could soon be right back at square one of massive deficits and painful budget choices," said Jeff Gorrell, the Assembly's budget committee's Republican vice chair.
Brown, who has yet to say whether he will seek re-election next year, will follow his initial budget plan next month with a revised plan in May that kicks budget talks into high gear just ahead of the state's June primary election.
"They all have an incentive not to blow up the process," said Jack Pitney, a professor of government at Claremont McKenna College. "Things are going well for California government for once and I don't think anybody wants to rock the boat."
Labor lobbyist Barry Broad expects spending increases will at best be gradual. California's current general fund budget includes $96.3 billion in spending, up from $95.7 billion in the prior fiscal year but below a peak of $103 billion in the 2007-2008 fiscal year.
"Some of those cuts need to be restored," said Broad. "But obviously we can't put ourselves in the same kind of fiscal position we were in before, where there was no ability to absorb the blows of an economic downturn."
The Legislative Analyst's Office has recommended the state have $8 billion set aside in three years in case of economic setbacks.
The office has also suggested the state use its improving revenue to pay back money it took from its various branches over the years to help close deficits in its general fund. It pointed to California's need to tackle a $71 billion unfunded liability for the pension benefits of teachers and school administrators.
Palmer declined to comment on details in Brown's budget plan, other than to say its "twin priorities" will be paying down the state's internal debt and building a reserve.
Encouraged by California's improving finances, its outlook for balanced budgets and Brown's plans for paying down internal loans, Standard & Poor's in January raised its credit rating on the state's general obligation debt by one notch to A, leaving Illinois as its lowest-rated state, at A-minus.
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