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California and the West

Budget Surplus Could Exceed Predictions

Finances: Analyst says state could have $10.3 billion by end of the 2001-02 fiscal year because of higher personal income and sales tax receipts, among other factors.


SACRAMENTO — California will accumulate a whopping $10.3 billion in surpluses over the next two years, the state legislative analyst predicted Thursday in her latest economic forecast.

The Golden State, which boasts the sixth-largest economy in the world, is expected to end the 2000-01 budget year with $6.9 billion in excess revenues--more than three times the surplus predicted in June, when the budget was adopted, according to a report released by Legislative Analyst Elizabeth Hill. She forecast that revenues could exceed spending by $3.4 billion in the next fiscal year.

"The good news is that the California economy is really outperforming expectations," said Hill, noting that her outlook is based on current spending and tax policies. "It creates a unique opportunity for the governor and the Legislature to position California well for the future."

The state's economic boom is being fueled by a combination of increases in personal income, sales tax receipts, employment rates and capital gains resulting from sales of stock.

Hill is forecasting continued growth for the next five years, but warned that the economic expansion could begin to ease starting next year.

General fund revenues, for example, are projected to rise 12% in 2000-01, after soaring nearly 21% last fiscal year. Personal income growth is expected to drop from more than 11% this calendar year to about 7% next year.

"Some of the increase [in personal income] in 2000 was due to employees cashing out stock options," at a level analysts don't expect to continue, said Brad Williams, a senior economist with Hill's office.

Of the $6.9-billion surplus the state is expected to have left over by July 1, Hill said, it makes sense to set aside about $2.5 billion for the 2001-02 budget reserve. This would leave about $4.4 billion for one-time commitments such as building highways or funding tax cuts. The $3.4-billion surplus predicted for the end of that year would be available for ongoing commitments.

Hill warned that two-thirds of the latter amount could be wiped out if Gov. Gray Davis and the Legislature decide to bolster education funding $1 billion over minimum requirements and if a new quarter-cent sales tax cut is extended.

The state's economy is so rosy that Davis announced late last month a one-year sales tax cut that will save Californians $1.1 billion. The tax cut was triggered by a 1991 law enacted by Davis' Republican predecessor. Senate Republican leader Jim Brulte of Rancho Cucamonga has called for the state to make the sales tax cut permanent. If Hill's forecast materializes, he said, the state will be able to enact the tax cut and do much more.

"It means we can fully fund our schools, we can cut college tuition in half, we can put $1 billion away on an annual basis for California infrastructure and we can cut taxes," he said. "We can do all of these things and we should."

Assemblyman Tony Cardenas, the Sylmar Democrat who heads the Assembly Budget Committee, said he and other legislators are open to tax cuts, though some question whether the public will notice a small reduction in sales taxes. The issue will be studied in January when the Legislature reconvenes.

The last two budgets, he said, have provided tax cuts and major funding commitments for education and transportation. "I think you can expect to see more of all of the above," Cardenas said.

The state Department of Finance, meanwhile, is preparing data that Davis will use to fashion a preliminary budget for the 2001-02 fiscal year, which he will release in January.

"In the first four months of the current fiscal year we're $1.6 billion over what we had forecasted," said Sandy Harrison, a finance spokesman. "It's clear from what we know so far that we're looking at several billion dollars."

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