By Jim Christie
SAN FRANCISCO, May 17 (Reuters) - California’s budget watchdog criticized Governor Jerry Brown’s outlook for the state’s revenues as “too pessimistic” in a report on Friday, saying his revised budget plan fails to account for tax revenues to be reaped from the stronger stock market.
“We do not agree with the administration’s view that there has been a significant dimming of the state’s near-term economic prospects,” the Legislative Analyst’s Office said in the report. “In addition, we observe that the administration’s new revenue forecast does not seem to reflect some recent economic improvements - most notably, a sharp increase in stock prices.”
Rises in stock prices typically cause investors to sell shares to realize profits, resulting in capital gains that are taxable as income.
Although the budget watchdog said it expects stocks to remain flat, it said that “the significant stock gains of recent months would provide a boost to state revenue collections in the coming months.”
Brown unveiled his revised budget plan for the 2014 fiscal year that begins on July 1 on Tuesday. Brown cut spending, saying he was concerned tax receipts would fall.
California relies heavily on revenue from personal income taxes, especially from the often volatile income tax receipts of its wealthiest residents.
An increase in tax rates on the wealthiest residents approved by voters in November was made retroactive to last year, fueling a jump in recent months in California’s revenue.
The governor’s budget team also is concerned about the broader economy should personal income growth slow as a result of federal spending cuts. California still has one of the nation’s worst unemployment rates even after its jobless rate fell to 9.0 percent in April from 10.7 percent a year earlier.
While the Legislative Analyst’s Office offered a more optimistic view of California’s financial prospects than Brown, it noted his “cautious approach to budgeting potentially would allow the state to deal with any economic downturn with less need for urgent budget cuts.”
“On the other hand, if the state adopts a cautious budgetary outlook and revenues are closer to our estimates, the Legislature would have much more flexibility to prioritize state spending within the next year or two,” the office’s report said.
Standard and Poor’s Ratings Service on Thursday called the cautious view of revenue in a the revised budget plan a good sign for the state’s near-term financial prospects.
S&P had raised its credit rating on California’s general obligation debt by one notch to A with a stable outlook from A-minus with a positive outlook after Brown’s initial budget plan in January, which predicted an $850 million surplus that would mark a break with California’s long history of budget deficits.
Brown’s revised plan maintains the surplus.
Fitch Ratings on Friday said Brown’s new plan is built on a “prudent” revenue forecast and “restrained” spending growth, and that it “would continue the disciplined approach to fiscal management shown by the state in recent years.”
Fitch in March revised its rating outlook to positive on California’s general obligation bonds, rated A-minus, citing improved fiscal management.