If surplus isn't the first word that comes to mind when someone mentions the state budget, you're probably in good company. But, after nearly a decade of battling red ink, that may be about to change.
California is on track to finish the current fiscal year with a $2.4 billion budget surplus, more than twice the original estimate. And, according to a report issued last week by the state's nonpartisan legislative analyst, that's just the beginning.
"We project that operating surpluses will grow at a rate of between about $1 billion and $3 billion each year between 2014-15 and 2017-18, at which point we estimate that they will reach $9.6 billion under current laws and policies," the report said. Even after temporary taxes from Proposition 30 expire, the report projects black ink.
Good news, no doubt. But this puts Jerry Brown in something of a bind. The governor has worked overtime to keep state spending in check, refusing pleas to restore funding for safety net programs as well as an alphabet soup of public agencies. He recently offered "a reality sandwich" to Janet Napolitano, bluntly telling the new UC president to rethink her request for an additional $120 million in state funding in 2014.
Brown is up for re-election next year, and 100 of 120 legislative seats will be on the ballot, too. So the pressure to spend this windfall will be immense.
In years past, big surpluses were accompanied by competing demands for hefty salary and pension increases and for equally hefty tax cuts. Sacramento politicians gladly obliged both, then pronounced themselves shocked to find the cupboards bare when an economic reversal produced budget deficits accompanied by rising eligibility for food stamps, Medi-Cal and other relief programs. This time, they should heed the caveats in Legislative Analyst Mac Taylor's budget forecast.
"An economic downturn within the next few years could quickly result in a return to operating deficits," his report said. "Further, the normal volatility of capital gains could depress (or boost) annual revenues by billions of dollars."
Taylor said the state's structural deficit has been eliminated, and he noted that Proposition 98's funding guarantees will ensure growing resources for K-12 education. Beyond that, he urged legislators to use the surplus to retire debt and build a strong reserve.
Only then, Taylor said, should legislators consider restoring programs, granting inflationary adjustments or investing in infrastructure or new ventures.
That's a prudent approach. In 2003, we witnessed the opposite of that. Gov. Arnold Schwarzenegger tried to borrow his way out of a deficit, saddling taxpayers with $15 billion in bonds, an amount dwarfed by the unfunded liabilities for the state's public employee and teacher retirement funds. Reducing those liabilities now offers the added benefit of giving legislators greater flexibility in writing budgets in the future, even more so if Taylor's forecast is accurate.
But that can only occur if legislators resist the temptation of another spending spree.