California is poised to shake off a legacy of budget deficits with an operating surplus more than doubling to $2.2 billion by the end of June on tax increases and gains in stocks, the state’s nonpartisan Legislative Analyst’s Office said.
The surplus, projected to reach $3.2 billion in the following year, should be used to expand programs and pay down $6.6 billion in recurring borrowing that Democratic Governor Jerry Brown calls a “wall of debt,” the analyst said Wednesday in a report.
Income taxes in the most populous U.S. state, fueled largely by capital gains from the performance of the stock market, provide the biggest share of revenue. Voters in 2012 raised rates to 13.3 percent on those making $1 million or more, the most of any state, and boosted sales levies.
“The state’s budgetary condition is stronger than at any point in the past decade,” Legislative Analyst Mac Taylor said in the report. “The state’s structural deficit — in which ongoing spending commitments were greater than projected revenues — is no more.”
The Standard & Poor’s index of shares has gained about 25 percent this year, after a 13.4 percent increase in 2012. Income-tax revenue covered 61 percent of general-fund spending last year.
The state’s relative borrowing costs have declined this year as its fiscal outlook has improved.
Investors demand about 0.35 percentage point of extra yield to own 10-year California debt rather than top-rated bonds, down from a gap of about 0.6 percentage point in January, data compiled by Bloomberg show.
The state’s revenue growth will slow when sales tax increases end in 2016 and the higher rates on incomes starting at $250,000 expire in 2018, the analyst said.
Brown, 75, forecast an $817 million surplus this year, the first in almost a decade, marking a turnaround after the state had strained under more than $100 billion of cumulative deficits since 2007.
Standard & Poor’s raised the state’s credit rating to A, sixth-highest, in January, the first boost since 2006. Fitch Ratings did likewise in August. Moody’s Investors Service grades it four steps below the top.
California had about $103 billion of gross tax-supported debt in 2012, ranking it first among U.S. states, according to Moody’s. It placed seventh on a debt-per-capita basis.
Tax revenue totaled $25.5 billion from July through October of this year, or 2.4 percent above projections, state Controller John Chiang said in a Nov. 8 update. The stronger-than-expected revenues demonstrate that “the Great Recession is becoming a faint image in the rear view mirror,” Chiang said in the statement on his website.
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