Brown Budget Damps California Spending Expectations

California Governor Jerry Brown damped lawmakers’ hopes for using a tax windfall with a revised budget that expends $1.3 billion less next year than he proposed four months ago.

The governor, who had projected a $97.7 billion plan in January, said economic growth was being curbed by higher federal payroll taxes and automatic budget cuts. Brown proposed a $96.4 billion budget for the year starting in July, about 1 percent more than current spending.

“We have a balanced budget and it’s solid,” the 75-year-old Democrat told reporters in Sacramento yesterday. “This is a prudent budget. It’s one that unlike those of the past is going to be very prudent, because we are dialing into some uncertain times.”

Brown persuaded voters in November to boost income and sales taxes as a way to end annual budget deficits that exceeded $100 billion combined since 2007. He’s vowed fiscal restraint with the tax money and won the state a credit upgrade by Standard & Poor’s, the first increase since 2006.

Brown’s budget, which includes a $1.1 billion reserve, would pay down a portion of what he calls the “wall of debt” - - his term for $35 billion in internal and external borrowing and delayed payments to schools and community colleges. Under the new plan, those debts would drop to $4.7 billion by 2017, he said.

Revenue Decline

The largest U.S. state by population will take in $2.8 billion more in the current fiscal year than the governor projected in January, officials said. But revenue will decline by $1.8 billion in the year that begins July 1, he said.

Brown’s estimate differs from the independent Legislative Analyst’s Office, which reported income taxes by the end of April were $4.5 billion above January projections.

Brown aides said revenue in May and June will be less than projected. They also said some of that cash must be counted for the 2012 fiscal year and some won’t actually come in until fiscal 2014. The 2013 fiscal year ends in June.

The budget assumes that this year’s windfall was a one-time infusion from high earners who cashed out investments at year’s end, before federal tax rates increased, at the expiration of a 2 percent payroll tax holiday put in place by former President George W. Bush.

It’s the end of that tax cut, along with automatic federal budget cuts known as sequestration, that Brown said are crimping California’s economic recovery. His new budget cuts in half his forecast for personal income growth in 2013 to 2.2 percent from 4.3 percent and slashes his wage growth forecast to 4 percent from 4.6 percent.

Payroll Tax

Brown may be overstating the consequences of the payroll tax and the sequester, said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto. The state continues to experience “very strong” growth in exports, employment and housing prices, Levy said by telephone.

“The California economy will do better, but that’s a different story than saying the governor is wrong,” Levy said. “Budget makers have to be cautious.”

Brown’s notion that higher taxes are harming economic recovery, a theme espoused by Republicans in Congress, was applauded by conservatives in the state legislature.

“The governor has revenue estimates that are lower than anyone expected, largely due to the increased payroll tax suppressing the economy,” said Senate Republican leader Bob Huff of Diamond Bar. “Higher tax rates and continuing high unemployment mean less money in people’s pockets and less money to propel the economy.”

Tax Credits

Brown also proposed replacing tax credits for employers in areas designated as blighted with a statewide sales-tax exemption for manufacturing and biotechnology equipment. The governor said he would “refocus” a tax credit for hiring new employees to apply to the long-term unemployed, veterans and people receiving public assistance.

Schools would get most of the additional revenue the state collects, with Brown proposing $1 billion to implement new national curriculum standards adopted by California and 44 other states. In all, schools stand to gain $2.9 billion more than in the current year under the state’s constitutionally mandated education financing formula.

Brown’s revised budget maintains his earlier proposal to overhaul how the state doles out money for schools, to send more to districts where the majority of students are poor and learning English as a second language. His plan has met with opposition from fellow Democrats, who say it would harm poor children struggling in districts where the majority aren’t low-income or learning to speak English.

Other Plans

Democrats, who control both chambers of the legislature with a veto-proof two-thirds supermajority, have said they wanted to use some of the additional revenue to restore cuts to health and welfare programs made in the last five years.

“I agree we must aggressively pay down our state’s debt and set aside money for a reserve, but there’s a disappointing aspect to this proposal,” said Senate President pro Tempore Darrell Steinberg, a Democrat from Sacramento. “It’s important that we also begin making up for some of the damage done to tens of thousands of Californians.”

Surplus

Brown’s proposal will still leave the state with an $850 million surplus, as proposed in January, the first in almost a decade. The recession brought a 24 percent drop in California’s tax collections by June 2010 from July 2007. The collapse wreaked havoc on state finances, hobbled by automatic inflation adjustments built into most programs and a reliance on volatile capital gains and other types of income taxes.

Brown’s first bid to rub out the recurring deficits, in 2011, was to prevent expiration of $11 billion in temporary taxes approved by his Republican predecessor, Arnold Schwarzenegger. When Republican lawmakers blocked that, he joined with labor unions to seek $6 billion in higher taxes at the ballot box last November.

Voters agreed to the highest statewide sales tax in the U.S., at 7.5 percent, and to boost levies on annual income starting at $250,000 -- reaching 13.3 percent on those making $1 million or more, the nation’s highest rate.

The tax increase, along with previous budget cuts and the improving economy, led Standard & Poor’s in January to raise the state’s credit rating to A, sixth highest, the first increase since 2006.

The extra yield investors demand for owning California state and local bonds was 66 basis points yesterday, according to data compiled by Bloomberg. The difference had declined to 52 basis points in March, the lowest in more than four years.

“There are risks,” Brown said yesterday. “We have to be planning for the next 14 months, and the next 14 months have not yet happened.”

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