June 14 (Bloomberg) -- California lawmakers are set to send a $96.3 billion budget to Governor Jerry Brown with spending tempered by his restrained revenue estimate, even as higher taxes have given the most-populous U.S. state a surplus for the first time in almost a decade.
Brown, 75, struck a deal this week with fellow Democrats who control the legislature to temper demands to use the extra money and wait for the state’s economic recovery to accelerate. Both the Senate and Assembly plan to vote on the fiscal road map later today, a day earlier than required by state law.
The governor persuaded voters in November to raise income and sales taxes to end deficits that cumulatively exceeded $100 billion since 2007. He has pledged to use the money from the temporary boost with restraint. The tax increases and Brown’s stance on spending won the state a credit rating upgrade from Standard & Poor’s in January, the first since 2006.
“We are in a slower recovery than has historically been the case,” Brown said at the Capitol when he announced the budget agreement June 11. “Therefore, we are tempering the spending to the flow of the new funding. In general, prudence rather than exuberance should be the order of the day.”
Brown insisted that the 2014 spending plan rely on revenue estimates he announced in May, when he said the state’s growth would be curbed by higher federal payroll taxes and automatic U.S. budget cuts, known as sequestration. Democrats had wanted to use a higher forecast from the nonpartisan Legislative Analyst’s Office to justify spending about $2 billion more.
To placate party colleagues and pay for additional spending on programs such as welfare-to-work, mental-health treatment, vocational education, dental care and college tuition assistance, Brown agreed to let them assume higher property-tax receipts than were included in his May estimate, as well as lower implementation costs for the U.S. Affordable Care Act.
Spending would increase for those programs that Democrats wanted to add or expand in future years, lawmakers said.
“The whole idea here is to make the most rational decisions we can with the resources we have,” said Assembly Speaker John Perez, a Democrat from Los Angeles, who joined Brown in a June 11 news briefing on the accord. “We are at the beginning point of the recovery that we expect to see for the California economy, not the pinnacle. We are going to ramp up our reinvestment as we ramp up our recovery.”
Brown also agreed to delay repaying schools about $650 million the state owes them from years when funding was withheld to help erase previous deficits. That money is part of what Brown likes to call the “wall of debt,” a reference to $35 billion in borrowing that he has promised to pay off.
Schools would get about $3 billion more than in the current fiscal year, including $1.2 billion to implement new national curriculum standards adopted by 45 states, including California. About $2 billion would go to schools where most students are poor or studying English as a second language, under a new formula sought by Brown that would increase their funding.
Democrats had opposed that plan because they said it hurt poor or English-learning students in wealthier districts. Brown and legislative leaders reached a compromise that boosts total per-pupil spending in all districts.
The budget would borrow $500 million in carbon-allowance auction proceeds, required by law to be spent on reducing emissions of pollutants, to cover general expenses. So far the auctions have generated about $260 million.
$1.1 Billion Reserve
Still, the budget would leave the state with a $1.1 billion reserve to absorb cost overruns or make up the difference if any revenue fails to meet targets.
California’s fiscal health has been strengthened by the levy increases on income and retail sales as well as by an improving economy that has fueled increases in capital-gains tax revenue. In May, the legislature’s analysis office estimated revenue would beat budget forecasts by about $4.5 billion.
Brown has insisted that the projected windfall was a one-time infusion from high earners who cashed out investments at year-end, before U.S. capital-gains rates rose. California’s fiscal year begins July 1.
Republicans, whose votes aren’t needed to pass the budget, lauded the decision to use Brown’s revenue estimate while criticizing plans to add spending in future years.
“It is promising that Democrats agreed to use the governor’s more conservative revenue projections instead of counting on money that may never materialize,” Assembly Republican Leader Connie Conway of Tulare said in a statement.
“Sadly, the governor was unsuccessful in his efforts to get Democrats to hold the line on new spending,” Conway said. “The majority party is using the budget gimmicks of the past to downplay spending increases. The budget proposal incrementally ramps up welfare payments that will end up costing taxpayers $1 billion annually.”
Lawmakers must pass a spending plan before June 16 or they start to lose pay under a 2010 law passed by voters. That measure also lowered the vote threshold to pass a funding blueprint to a simple majority instead of two-thirds.
Before the changes, California budgets were routinely late, including by a record 100 days in 2010 under Republican Governor Arnold Schwarzenegger. Since Brown took office in January 2011 and the changes in the law went into effect, the delays have ended. California last enacted budgets without missing its deadline for three consecutive years in the middle 1980s.
“Ho-hum -- another on-time, balanced budget in California,” Senate President Pro tem Darrell Steinberg, a Democrat from Sacramento, joked to reporters. “This is the third year in a row and this one feels even better than the first two.”
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