Jerry Brown's Legacy: A $6.1 Billion Budget Surplus in California

By Alejandro Lazo and Nour Malas Features Dow Jones Newswires

California Gov. Jerry Brown appears poised to exit office next year with a top political priority in hand: free from the massive budget deficits that had weighed on his predecessors.

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Buoyed by tax increases passed under his administration and a strong economy, Mr. Brown said Wednesday that the state is projecting a $6.1 billion surplus for the next fiscal year, which begins July 1.

The governor proposed socking most of the money away in a rainy-day fund whose creation he pushed for in 2014. Nearly 70% of the state's projected revenue of about $135 billion next fiscal year is derived from personal income taxes, according to the governor's office.

The state's fiscal health is especially crucial as it faces myriad challenges: record natural disasters, housing shortages and changes to federal tax regulation -- all while it ramps up opposition to the Trump administration on several major policy fronts.

As is his custom, the governor warned of an inevitable economic slowdown.

"California has faced 10 recessions since World War II, and we must prepare for the 11th," he said. "Let's not blow it now."

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Mr. Brown has been preaching frugality for years -- he kicked off one past budget talk with Aesop's fable about the thrifty ant and the lazy grasshopper.

Mr. Brown took office in 2011 with a $27 billion deficit and drastically slashed spending. In 2012, he staked his governorship on a tax increase that voters approved that year and reauthorized in 2016.

His spending plan for 2018 calls for $131.7 billion of general fund spending. Including special funds and bonds, which are pools of restricted money that can only be used for specific projects, total proposed spending next fiscal year is $190.3 billion.

The governor's budget document marks the start of roughly six months of negotiations with the Democratic-controlled legislature.

The state's budget must be approved by June 15, so it can be enacted July 1.

Many in Mr. Brown's party, which wields the power to raise taxes with two-thirds majorities in both state houses, have pushed for increased spending on social programs as the state has recovered from the last recession.

On Wednesday, Republicans called on the governor to return some of the budget surplus to voters -- saying they were overtaxed.

Assemblyman Vince Fong, a Republican from Kern County and a former staffer of House Majority Leader Kevin McCarthy, said the forecast windfall was evidence that a gasoline tax increase passed by Democrats last year was unnecessary.

"We do not have a revenue problem, we have a spending problem," Mr. Fong said. "Taxpayers work hard for their income -- we should work just as hard to protect it."

State officials and economists said planning for the 2018-2019 budget cycle had been particularly difficult this year.

They said state finances are facing a notably volatile period, given changes to federal tax law poised to hit California especially hard.

"I think there's more financial uncertainty between Washington and Sacramento than in the past," said Jerry Nickelsburg, director of the University of California, Los Angeles Anderson Forecast, a leading forecaster.

California, along with other high-cost and high-tax states, is considering ways to lessen the impact of the federal tax overhaul, which will raise taxes on a significant number of high-earners in the state.

State senate leader Kevin de León introduced legislation last week that would allow California taxpayers to donate to a fund and deduct 100% of the donation, essentially turning state tax payments into a deductible charitable contribution.

Other Democratic-led states, including New Jersey, are considering similar tactics to push back against what their leaders see as an unfair politically motivated move by the Trump administration against blue states.

While Mr. Brown warned of a slowdown Wednesday, he also touted increased funding in the state's public schools and infrastructure programs as well as his efforts to pay down debt taken on by previous administrations.

Mr. Brown's two most immediate predecessors were consumed by state budget woes at the end of their tenures. Democrat Gray Davis was recalled from office in 2003 after a recession, an energy crisis and controversial cuts led his popularity to sink.

Republican Arnold Schwarzenegger defeated Mr. Davis in the recall election, but he too was consumed with deficits as state coffers were pummeled by the last recession.

"One thing governors don't like is to be presiding over a hemorrhaging budget because people do blame them," Mr. Brown said Wednesday. "And for that reason, if none other, we are going to keep this steady as we go."

Write to Alejandro Lazo at alejandro.lazo@wsj.com and Nour Malas at nour.malas@wsj.com

(END) Dow Jones Newswires

January 10, 2018 17:55 ET (22:55 GMT)