California to Post $851 Million Budget Surplus, Brown Says

California is poised to end its next fiscal year with an $851 million surplus, the first in more than a decade, Governor Jerry Brown said as he unveiled a budget that includes revenue from voter-approved tax increases.

Brown’s spending plan assumes the state will receive more revenue from the elimination of redevelopment agencies than the independent Legislative Analyst’s Office projected in November when it forecast a $1.9 billion shortfall. Brown also expects to slow repayment of internal borrowing from special funds.

The governor, a 74-year-old Democrat, won office in 2010 on a vow to repair the crippled finances that plagued the world’s ninth-biggest economy as lawmakers papered over $200 billion of deficits in the past decade.

“I am determined to avoid the fiscal mess that previous governors struggled with,” Brown said today at a news briefing in Sacramento.

Californians in November granted Brown the highest statewide sales tax in the U.S., at 7.5 percent, and boosted levies on income starting at $250,000 -- reaching 13.3 percent on those making $1 million or more, the most of any state.

“We are not going to play the game of spending money we don’t have,” the governor said. “We have fixed it.”

Brown said the surplus could be at risk from federal deficit actions, a delay in the economic recovery or increasing health-care costs.

Record Deficits

The surplus contrasts with a $15.7 billion deficit that Brown and lawmakers had to fill in the current year and a record $42 billion in 2009, when a political battle over how to erase the gap forced the state to issue $2.6 billion of IOUs to pay bills during the impasse.

The surplus may have broad implications for the state’s lagging credit rating, and thus its cost of borrowing.

Standard & Poor’s, which last upgraded California in 2006, revised its outlook to positive in February. The rating company said it would boost the level within two years if Brown resolved the budget gaps. S&P grades the state A-, six steps below AAA and the lowest in the U.S.

Extra Yield

The extra yield investors demand for owning California state and local bonds was 76 basis points yesterday, according to data compiled by Bloomberg. The difference had declined to 53 basis points in November, the lowest in four years.

“The market has recognized that the credit quality of California has been improving,” said Michael E. Johnson, managing partner at Gurtin Fixed Income Management LLC in Solana Beach, California, which manages $4 billion in municipal debt. “Seeing headlines like this may make investors more willing to buy California paper, which may compress the spreads a bit.”

Brown will revise his budget in May with the latest revenue and spending estimates. Lawmakers have until June 15 to pass a spending plan, or lose their pay until they do.

The budget can be approved on a simple majority vote, thanks to a 2010 initiative that lowered the requirement from two-thirds. Any attempt to raise taxes needs approval by a supermajority, a power Democrats will enjoy for parts of this calendar year.

Democrats have indicated they want to use some of the higher revenue to restore funding for programs that were cut.