The state of California, bedeviled by a decade of acute budget deficits – including a whopping $15.7 billion shortfall last year – is looking to make a fiscal U-turn.
In a new report from the respected non-partisan Legislative Analyst’s Office, California’s projected deficit in the next fiscal year will be $1.9 billion, dramatically lower than the mountains of red ink the state has grappled with in the past.
Voters earlier this month approved Proposition 30, a temporary increase in sales and income taxes. The measure, along with the state’s economic recovery and prior budget cuts, “have combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges,” the LAO said.
In fact, if the state continues its economic growth and restrains spending, “there is a strong possibility of multibillion-dollar operating surpluses within a few years,” the LAO said. The potential surpluses range from $1 billion in 2015 to $9 billion in 2018.
Contributing to the improved outlook is a recent uptick in revenues. Controller John Chiang reported that state revenues rose in October by $208 million, 4.4% above estimates and budgeted income is on track for the year. Strong personal income and sales tax growth are responsible for the revenue improvement.
It remains to be seen however, if increased taxes, as some predict, have a dampening effect on the analyst’s optimistic growth projections.
Regardless, bondholders can take solace in the fact that despite California’s history of budget volatility, it has always met its state debt obligations.