* "Promising moment" for state's finances
* Revenue seen improving after election
* State still needs to restrain spending
(Adds analyst comments, background, byline)
By Jim Christie
SAN FRANCISCO, Nov 14 (Reuters) - California faces a $1.9
billion budget gap for its next fiscal year, a much smaller
deficit than in prior years due to the economic recovery,
spending cuts and new revenue from tax hikes approved last week
by voters, the state's budget watchdog said on Wednesday.
"Our economic and budgetary forecast indicates that
California's leaders face a dramatically smaller budget problem
in 2013-14 compared to recent years," the report by the
Legislative Analyst's Office said.
California has reached a "promising moment: the possible end
of a decade of acute state budget challenges," the report added,
noting that there also is a "strong possibility of
multibillion-dollar operating surpluses within a few years."
California could have an operating surplus in its 2014-2015
fiscal year of more than $1 billion, which could grow to more
than $9 billion in the 2017-2018 year, according to the report.
But the office cautioned that its forecast depends on a
number of factors, including steady economic growth, rising
stock prices and state leaders holding down spending.
"These estimates mean that the new Legislature and the
Governor will need to address a $1.9 billion budget problem in
order to pass a balanced budget in June 2013 for the next fiscal
year," the report added.
Voters last week also gave Democrats a super majority in the
state legislature. That allows them to bypass a Republican
minority that previously had enough votes to block bills to
increase taxes and to overturn vetoes by Governor Jerry Brown if
necessary. The governor has been in conflict with fellow
Democrats in the legislature reluctant to cut spending.
"We also assume - as the state's recent economic forecasts
have - that federal officials take actions to avoid the
near-term economic problems associated with the so-called
'fiscal cliff,'" the report said.
California's main source of revenue is personal income
taxes, and it relies heavily on its wealthiest residents for
They will face higher income tax rates after voters last
week approved tax measure put to them by Brown. The measure
raises the state sales tax by a quarter-cent for four years and
increases income tax rates for seven years for individuals who
earn more than $250,000 a year.
USES FOR NEW REVENUE
The Legislative Analyst's Office in its report urged that
California's government use budget surpluses to build a reserve
and to tackle outstanding pension liabilities, particularly for
the state's teachers pension fund.
Surplus funds could also be tapped to "selectively" restore
recent spending cuts, particularly for cuts affecting schools,
or to invest in the state's infrastructure, the report said.
Standard & Poor's Ratings Services analyst Gabriel Petek
said the report's outlook is in line with his agency's view of
California's finances, which have been improving in recent
Brown in January projected at a budget gap of more than $9
billion for the current fiscal year ending June 30, 2013,
compared with the $25 billion shortfall the state's leaders
faced in the prior year.
Petek said S&P would keep a close eye on any moves by
lawmakers to dramatically increase spending: "It could undercut
the progress they've made were they to accelerate their spending
significantly ... They need to be as prudent as possible."
S&P analysts in a note last week said California's credit
quality looks to improve after voters approved Brown's tax
measure. S&P rates California A-minus - the lowest rating for
any state - with a positive outlook.
"The measure does more than temporarily increase operating
revenues and, in our view, is the linchpin to the governor's
broader, multi-year strategy for reversing the state's negative
budget position," the note said.
"By providing a temporary but significant boost in tax
revenues and permanently lowering its general fund spending
baseline, we believe Proposition 30 helps alleviate the state's
chronic fiscal strain," the note added.
S&P's analysts see the potential for revenue raised by the
measure to help California pay down three-quarters of its
approximately $34 billion in off-balance-sheet obligations from
budget liabilities and payment deferrals over the past decade.
Revenue from the measure could also help pay for Brown's
"realignment" initiatives, according to S&P's analysts. The
efforts involve handing responsibility for some state programs
such as jailing low-level criminals to local officials.
One concern for S&P over the tax measure is that it could
increase revenue volatility that has plagued California over the
past decade because 80 percent of the revenue it raises will
come from high-income taxpayers, according to S&P.
(Reporting by Jim Christie; Editing by Dan Grebler)
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