California's Sudden Surplus — and Why It May Not Last

Sacramento is flush with cash. That’s no typo – for the first time since the end of the dot-com boom, the Legislative Analyst’s Office is projecting multibillion dollar cash surpluses over the coming fiscal years.

The LAO’s report on California’s fiscal outlook serves as an unofficial start to next year’s budget cycle, which will kick off in early January when Gov. Jerry Brown unveils his proposed state budget. The LAO predicts Brown and lawmakers will have a lot of money to work with: a projected $2.4 billion surplus next year, and another $3.2 billion in extra revenue in 2015.

Where did the extra money come from? Analyst Mac Taylor credited three factors: “We finally have an economic recovery — the best way to grow yourself out of problems,” he said. “We had [tax measure] Proposition 30, which has obviously provided relief and revenues. …And  all of the efforts the legislature took during the bad years, of slowing the growth in many programs, and in some cases taking reductions in programs.”

That includes this year’s relatively conservative state budget, which Brown built on cautious tax estimates.

But Taylor is telling lawmakers not to get too excited about the additional income. The LAO’s report warns things can always turn south quickly, so the office is recommending the legislature use the surplus to build up a rainy day fund and pay down California’s debt.

The Brown administration agrees with the restrained approach. Spokesman H.D. Palmer pointed out just 1 percent of state residents pay 40 percent of California’s income tax revenue. “And for that narrow band of taxpayers, most of their income doesn’t come from salaries and wages,” he said. “It comes from things like capital gains. Which are the most volatile and difficult-to-forecast revenues that we have in California.”

To put it another way,  if the market goes south again, California would quickly be in the red.

Still, many rank-and-file Democrats were frustrated that this year’s budget didn’t do more to restore the deep cuts lawmakers instituted during the recession. And if the surplus keeps growing, you can bet pressure will mount to hike spending.

Senate President Pro Tem Darrell Steinberg’s response to the LAO hints at that. He agreed with Brown and the LAO’s cautious approach, saying, “There is ample room to pay down debt, build a healthy reserve to hedge against an economic downturn, address long-term pension and health obligations,” but the Democrat said there’s also money to “expand worthy programs for people and our economy.”

Read the LAO report: