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SAN FRANCISCO, Jan 6 (Reuters) - California lawmakers returned to work on Monday facing a much improved outlook for the state budget, spurring plans for setting aside money in a rainy day fund to shield the state's finances from future slumps in revenue.
Governor Jerry Brown has already told fellow Democrats who control the legislature to not assume the state government can afford to ramp up spending despite its strengthening revenue.
Brown on Friday will unveil his budget plan for the fiscal year beginning in July and it has the potential, according to the state's budget watchdog agency, to include a reserve topping $2 billion in the current fiscal year.
The governor, who has yet to say whether he will seek re-election, has been preaching the need for California to pay down debt and build reserves.
After several years of austerity to tackle massive budget gaps, Democrats in the legislature would like to increase spending. But their leaders are also urging setting funds aside.
Darrell Steinberg, the State Senate president pro tem, has proposed using a third of surplus funds to pay down debt, a third for building reserves and a third for increasing spending on social services.
Assembly Speaker John Perez has called for some spending increases but he also wants lawmakers to put a measure to voters in November that proposes building a rainy day fund.
Both plans underscore a "broad recognition" that California's revenue, which relies heavily on personal income taxes from the wealthy, can be extremely volatile, said Mark Baldassare, president and chief executive of the Public Policy Institute of California.
"There is going to be a lot of caution around increasing spending," Baldassare added.
The Los Angeles Times reports Brown will include Perez's measure in his budget plan and propose funds the state is raising through its carbon trading market be used to bolster its planned high-speed rail system. Brown's spokesman for budget matters declined to comment on specifics of his spending plan.
A Sacramento County Superior Court judge in November said there was not enough information to support a decision by the authority in charge of planning the rail system to move forward with the sale of more than $8 billion in bonds to help fund the project. The judge also ordered the authority to rescind its funding plan for the system but did not halt the project, which has more than $3 billion in federal funds at its disposal.
California voters in 2008 approved nearly $10 billion in state general obligation bonds to help build the rail system. Critics point out the system's officials have so far secured only a fraction of the estimated $68 billion needed to build it and that they face lawsuits seeking to derail it. They also face opposition from Republicans in Congress.
California's treasurer will not sell additional bonds for the rail system until it is clear of legal challenges.
Another bond matter California lawmakers may take up is the $11 billion bond measure for water projects, pulled together in 2009 with compromises between environmental and farming interests and water districts.
The legislature has twice postponed statewide votes on the bond measure and some lawmakers fear voters, despite a record dry year in 2013, would reject it due to its size. Two lawmakers are pushing separate plans to reduce the size of the measure to $6.5 billion. Brown has a separate big-ticket plan for water infrastructure under development.