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California's Troublesome Budget Surplus

Jerry Brown wants to keep the budget under control, but other Democrats want to spend.

By Alison Vekshin

California Gov. Jerry Brown has a tight fist when it comes to the budget. His fellow Democrats are pushing him to loosen his grip as state coffers overflow with billions in extra cash.

The Democrats, who control both chambers of the statehouse, are drafting a budget that spends more than the record $115 billion Brown proposed in May. To boost funding for childcare and other programs for the poor, they cite a revenue projection from California's fiscal analyst that is $3.1 billion higher than Brown's estimate.

Brown is advocating a conservative approach to gird the most populous U.S. state against the next recession, even as a surge in revenue from capital gains earned in Silicon Valley and from temporary tax increases has plowed $6.7 billion more into his treasury than he estimated in January. The surplus is fleeting and the money should be banked, he says.

"The longer you're away from a recession, the less you remember it and all you see is money coming in," Brown said in a May 27 speech in Sacramento. "Usually at the point when the recession is right around the corner and people are feeling the best ever and they want to just spend, we crash."

California's rosy fiscal condition is in contrast to other U.S. states such as Alaska, Nevada, Kansas and New Jersey that have been forced to cut spending, tap reserves and consider higher taxes to balance their budgets.

In the last decade, California suffered persistent deficits and was often compared with Greece for its fiscal dysfunction. In 2009, the state paid its bills with IOUs amid a budget impasse.

Lawmakers have until June 15 to pass a budget or lose their pay. Members of the Senate and Assembly are drafting a single plan they can bring to a vote.

Brown's budget pours most of the surplus into schools and a rainy day fund as required by law. His spending plan, a 6 percent increase from the current year's $108 billion, also pays down debt accumulated under previous governors to paper over deficits.

Depending upon how close the final spending plan mirrors Brown's proposal, California could see its credit rating from Standard & Poor's, once the lowest in the nation, raised to its highest in 14 years, the company said in May.

State Sen. Mark Leno, a Democrat from San Francisco and head of the budget committee, said the debate is over less than 1 percent of the money, involving $500 million to $1 billion in discretionary spending.

The Senate's plan adds more money to the rainy-day fund and debt repayment than Brown's proposal because lawmakers are using the higher revenue estimate, he said.

"It's not a big battle, but there will be a hearty debate," Leno said in an interview. "With a recovering economy we are now in a much more stable fiscal footing, but the damage still remains. We have a long ways to go to rebuild to where we were before 2008."

The governor has leverage over lawmakers because Democrats aren't unified enough to secure a two-thirds vote needed to override a veto, said Raphael Sonenshein, executive director of the Edmund G. "Pat" Brown Institute for Public Affairs at California State University at Los Angeles, named after Brown's father, who also was governor.

"The legislature is pushing harder now because of the availability of money," Sonenshein said. "While I think the governor is going to give in on a number of things, he still will have the argument to make that you don't want to kill the goose that laid the golden egg."

(c)2015 Bloomberg News

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