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Skepticism Remains High as LAO Report Predicts Future State Budget Surplus

November 30, 2012

Shortly before the Thanksgiving holiday, on Nov. 14, the Legislative Analyst’s Office (LAO) released its report “The 2013–14 Budget: California’s Fiscal Outlook,” calling California’s outlook promising and crediting the passage of Proposition 30, predicting a surprising multibillion-dollar surplus within a few years. The report indicates that despite these positive projections for the future, California still faces a deficit of $943 million in FY 2012–13.


The deficit is attributed to increased spending, lower than expected revenues from the dismantling of redevelopment, disappointing returns from the Cap-and-Trade auction, Facebook’s failure to garner expected stock earnings, and discrepancies in corporate tax and personal income tax projections.

The report’s projections assume a steady economic recovery for the state and a continued focus by Gov. Jerry Brown and the Legislature to maintain previous budget cuts.

The report provides a comprehensive look at the state’s current and projected budgetary situation. It takes into account the effects of the November 2012 voter initiatives, however omits COLAs and inflation adjustments and assumes that federal law makers will come to agreement to avoid detrimental effects of the “fiscal cliff.”

Report highlights:

  • Redevelopment Savings Much Less: LAO’s report estimates that the state budgetary gains projected from the dissolution of redevelopment are actually $1.8 billion less than assumed.
  • Cap-and-Trade Revenues Unlikely to Materialize: While the state budget originally predicted that $500 million in revenues would be generated by the auction, LAO projected that only $100 million could be gained. The first Cap-and-Trade auction on Nov. 14 only raised $289 million for the state, with most of that is earmarked for utilities and ratepayers. According to the Sacramento Bee, “the state may only raise $140 million in the first year.”
  • Unfunded Retirement Liabilities: Despite recent progress in reforming the pension system the state still faces more than $150 billion in unfunded benefits earned by current and former public employees.
  • Other Factors: The expiration of furloughs and the Personal Leave Program in June 2013, infrastructure bond debt service, judicial expenditures, and special loan repayments also will contribute to the deficit.

To read the full report, which contains a comprehensive look at the challenges facing the state, please visit LAO’s website.   

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