* Revenue, spending mostly in balance
* Economic expansion, tax hikes seen boosting revenue
* Credit rating could be raised
By Jim Christie
SAN FRANCISCO, Jan 14 California's budget
watchdog largely commended the first projected surplus in years
unveiled by Governor Jerry Brown, saying in a report on Monday
that the state's spending and revenue in his budget plan were
now "roughly in balance."
That compares with previous budget plans that had to tackle
often massive budget gaps, the Legislative Analyst's Office said
in its report.
"Over the past several years, each January Governor's budget
has included billions of dollars in proposed solutions -
expenditure reductions, revenue increases, borrowing and other
actions - in order to close budget shortfalls," the report said.
The Legislative Analyst's Office only in November had
predicted a nearly $2 billion deficit.
The Democratic governor on Thursday delivered some rare good
news in his spending plan for the state's fiscal year beginning
in July, saying California's budget deficit is gone after years
of financial troubles, allowing for increased spending on
education and healthcare.
Supported by a state economy expanding quicker than the rest
of the nation and new revenue from tax increases, Brown's plan
includes a surplus of $851 million, in addition to a projected
$785 million surplus for the current fiscal year, which ends in
The report by the Legislative Analyst's office struck an
optimistic tone about California's finances, which the
recession, housing crash and financial crisis roiled in recent
years by opening massive budget gaps.
California, where deep deficits were also common before the
2007-2009 recession, has the nation's lowest credit rating:
A-minus by Standard & Poor's. But the rating agency has a
positive outlook on California and sees the potential for an
upgrade if the state maintains fiscal discipline.
The office's report on Monday applauded Brown's vow to hold
down most state spending and suggested caution.
Some Democrats would like to see more funds going to social
services after years of steep cuts and hope to increase spending
now that they have a supermajority of seats in the legislature.
"The governor's emphasis on fiscal discipline ... is
commendable, especially in light of the risks and pressures that
the state still faces," the report said.
The report added that there are "still considerable risks to
revenue estimates given uncertainty surrounding federal fiscal
policy and the volatility inherent in our revenue system."
Brown said California has to hold down most of its spending
due to uncertainty about the direction of talks in Washington
over the federal budget and the economic recovery. He also is
concerned about potential increases in healthcare costs and
lawsuits that could block parts of the state budget.
Brown is correct to stress fiscal discipline given the
potential risks to the state's revenue, especially risks from
moves in Washington that could hurt the economy, State
Controller John Chiang told Reuters on Monday.
"We still have Washington that has to make some very
critical decisions," Chiang said.
Under Brown's budget plan, spending in the upcoming year is
set to rise $4.7 billion from the current 2012-13 budget.
Schools and universities will get a $4 billion boost, health
spending will rise $1.2 billion, while transfers to local
governments will drop $2.1 billion.
Brown also wants to put $1 billion in a rainy-day fund, pay
down internal loans used to help close budget gaps over the past
decade and put the state in a position where it can post
surpluses in future fiscal years.
While California's finances appear to be stabilizing, in
part thanks to tax increases approved by voters in November, the
state will still face serious budget challenges, the Legislative
Analyst's Office said in its report.
The office pointed to "huge unfunded liabilities associated
with the teachers' retirement system and state retiree health
"As such, the state faces daunting budget choices even in a
much-improved fiscal environment," the report said.
HJ Sims analyst Dick Larkin has concerns that California's
revenue may not meet the Brown's administration's forecast. But
he said the governor's budget plan is reasonable and that if a
shortfall reappears it will be manageable thanks to more money
flowing into California's coffers.
Larkin expects the state will see its general obligation
bond rating raised one notch before the end of this year. "It
looks like California has finally turned the corner on credit
risk," he said, adding that rating agencies "have just been
waiting to bring California out of the basement."