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"Strong Possibility" of Budget Surpluses In A Few Years

LAO Issues Rosy Budget Forecast for 2013-14

November 15, 2012

The California Legislative Analyst’s office issued a cautious but quite hopeful budget forecast for the 2013-14 fiscal year on Wednesday, including the “strong possibility of multi-billion-dollar operating surpluses within a few years.” The forecast is a sharp contrast to the warnings of lingering debt and financial difficulties that have figured prominently in the LAO’s remarks during the past few years. The LAO’s summary released on Wednesday stated:

Budget Situation Has Improved Sharply.

The state’s economic recovery, prior budget cuts, and the additional, temporary taxes provided by Proposition 30 have combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges. Our economic and budgetary forecast indicates that California’s leaders face a dramatically smaller budget problem in 2013–14 compared to recent years. Furthermore, assuming steady economic growth and restraint in augmenting current program funding levels, there is a strong possibility of multibillion–dollar operating surpluses within a few years.

Projected $1.9 Billion Budget Problem to Be Addressed by June 2013.

The 2012–13 budget assumed a year–end reserve of $948 million. Our forecast now projects the General Fund ending 2012–13 with a $943 million deficit, due to the net impact of (1) $625 million of lower revenues in 2011–12 and 2012–13 combined, (2) $2.7 billion in higher expenditures (including $1.8 billion in lower–than–budgeted savings related to the dissolution of redevelopment agencies), and (3) an assumed $1.4 billion positive adjustment in the 2010–11 ending budgetary fund balance. We also expect that the state faces a $936 million operating deficit under current policies in 2013–14. These estimates mean that the new Legislature and the Governor will need to address a $1.9 billion budget problem in order to pass a balanced budget by June 2013 for the next fiscal year.

Surpluses Projected Over the Next Few Years.

Based on current law and our economic forecast, expenditures are projected to grow less rapidly than revenues. Beyond 2013–14, we therefore project growing operating surpluses through 2017–18—the end of our forecast period. Our projections show that there could be an over $1 billion operating surplus in 2014–15, growing thereafter to an over $9 billion surplus in 2017–18. This outlook differs dramatically from the severe operating deficits we have forecast in November Fiscal Outlook reports over the past decade.

Despite Positive Outlook, Caution Is Appropriate.

Our multiyear budget forecast depends on a number of key economic, policy, and budgetary assumptions. For example, we assume steady growth in the economy and stock prices. We also assume—as the state’s recent economic forecasts have—that federal officials take actions to avoid the near–term economic problems associated with the so–called “fiscal cliff.” Consistent with state law, our forecast omits cost–of–living adjustments for most state departments, the courts, universities, and state employees. The forecast also assumes no annual transfers into a state reserve account provided by Proposition 58 (2004). Changes in these assumptions could dramatically lower—or even eliminate—our projected out–year operating surpluses.

Considering Future Budget Surpluses.

If, however, a steady economic recovery continues and the Legislature and the Governor keep a tight rein on state spending in the next couple of years, there is a strong likelihood that the state will have budgetary surpluses in subsequent years. The state has many choices for what to do with these surpluses. We advise the state’s leaders to begin building the reserve envisioned by Proposition 58 (2004) as soon as possible. Beyond building a reserve, the state must develop strategies to address outstanding retirement liabilities—particularly for the teachers’ retirement system—and other liabilities. The state will also be able to selectively restore recent program cuts—particularly in Proposition 98 programs (based on steady projected growth in the minimum guarantee).

To read the LAO’s complete report, click here.

Source:  California Legislative Analystís Office