Caution about revenues beyond that

California’s Legislative Analyst’s Office issued a positive outlook for the next few fiscal years. Of course, a recession will change the forecast for future years.

In the report, the LAO estimated “… General Fund revenues will continue to grow in the near term …” regarding forecasting spending and revenues for fiscal 2018-19, which begins July 1, 2018.

Revenue growth will largely occur through increased personal income taxes. These were initially raised in 2012 and voters extended with approval of Proposition 55 in 2016. The LAO is projecting that the state will likely see a surge in capital gains revenue next year.

“For over a year, there has been strong stock market growth. We have expected that growth to be accompanied by an increase in quarterly tax payments (typically made by higher-income taxpayers). That surge has not yet materialized.

“We suspect that many high-income individuals might have a large tax liability for 2017 …  If we are right, monthly revenue collections in December 2017, January 2018, and/or April 2018 will exceed the administration’s most recent projections,” is the reason for the positive revenue forecast.

However, the LAO expressed some concern about the direction of expenditures for school districts, community colleges, Medi-Cal and state employee compensation costs, including pensions.

Proposition 98 controls the funding levels for K-12 education and community colleges. The LAO is already estimating that improved revenues this fiscal year will result in another $650 million for education funding. In fiscal 2018-19, higher revenue could push education funding up another $2.6 billion.

Medi-Cal expenditures also are projected to be $600 million less than the current budget plan. Proposition 56 (tobacco tax) has helped reduce the demand on General Fund sources.

However, the LAO is projecting that Medi-Cal expenses in 2018-19 will grow $2.2 billion.

And another $1 billion demand on the state’s revenue will be compensation for employees. The LAO projects pay costs will grow $540 million, due to new employee agreements. Many of the agreements provide for a 4-percent pay increase next year.

Also, pension and health benefit costs will likely increase $500 million.

Overall, the LAO projects revenues will be $3.7 billion greater than the expected expenses in 2018-19. It also is expected that the current-year revenue will be $3.8 billion greater than the June 2017 forecast.

The result is that the state’s reserves will total about $13.6 billion when fiscal 2018-19 begins and will grow to $19.3 billion, if the Legislature does not enact more spending.

If the state were to confront an economic recession after 2018-19, the LAO foresees these reserves being used to continue programs before any spending reductions are approved.

In January, Gov. Jerry Brown will submit his last budget proposal. A year ago, he cautioned legislators about increasing expenditures because a recession would damage the budget and reserves. He is likely to continue this message next month.

Forecasting the future budget is fraught with uncertainties, such as federal actions on healthcare costs and state pensions. Consequently, the LAO’s recommendation to the Legislature is to continue building reserves until the effect of these significant uncertainties becomes better known.