Thread: California headed toward a budget surplus?

Published: Nov. 26, 2012 Updated: 1:29 p.m.

Is California headed toward a budget surplus?

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  GRAPHIC:
  Budget surplus forecast
  
  • CHART: Budget surplus prediction through 2018
  
  
  By DANIEL WEINTRAUB / FOR THE REGISTER

For as long as many Californians can remember, it seems, the state government has been struggling with budget deficits. Year after year, lawmakers and governors adopt a budget that is supposedly balanced, only to discover – shocking – that the assumptions behind the spending plan were fanciful, or conditions changed, and the red ink overflowed.

Amazingly, this sad history might be coming to an end. Don't bet your house on it (if you have any equity left with which to bet). But it really does look like change is afoot.

Calif. Gov. Jerry Brown campaigns supporting Proposition 30 at James Lick Middle School in San Francisco in August. Brown is delivering on a campaign promise he made two years ago to fix California's perpetual budget deficits and raise taxes to do it only if voters agreed. Brown says voters put their trust in his plan during the election by approving Prop. 30.

PAUL SAKUMA, AP

An improving economy, voter-approved tax increases and, yes, spending restraint in Sacramento are combining to give revenues a chance to catch up to spending in the years ahead. Soon the debate in the Capitol might not be about what to cut, but about how to spend a surplus.

The decade-long string of deficits began with the burst of the dot-com bubble in 2001. All through the late 1990s, the technology boom fueled a red-hot California economy. Soaring incomes, investment returns and corporate profits produced more tax revenue than legislators knew what to do with.

That didn't stop them, though. They spent this “found money” as if it would flow at that rate forever, starting new programs and shoring up old ones. They also cut taxes for business and families.

Then the bubble burst. Tax collections collapsed, but the new spending was on auto-pilot, programmed to continue indefinitely. The tax cuts were mostly locked in place, too, shrinking the tax base. A chasm opened up between revenues and spending that has, for the most part, lasted ever since.

Former Gov. Gray Davis used the last of the 1990s surplus to try to close the gap, but that was good for only one year. He used his executive powers to return the car tax to the rates in place before legislators had reduced it. But the voters then recalled Davis from office and elected Arnold Schwarzenegger, who pledged to reduce the car tax again. He did, and the deficits continued.

The housing boom in the mid-2000s almost got the state back in the black. Schwarzenegger and lawmakers claimed that they had balanced the budget a time or two. But that was mostly with smoke and mirrors, debt-financing and wishful thinking, and the collapse of the housing market ended any chance Schwarzenegger ever had of ending the deficits. The gap between the money the state was taking in and how much it was spending each year persisted.

Enter Jerry Brown. Brown, at 74 years old and doing his second tour as governor, said he had no interest in kicking the budget can down the road again. He wanted to solve the problem. But he also said he would not raise taxes without a vote of the people.

So he clamped down on spending, cutting university budgets, holding K-12 education to the minimum and slashing health and social service programs. And he gathered signatures for a ballot initiative to raise income taxes on the wealthy and increase the sales tax by a quarter-cent on the dollar.

Brown cobbled together a coalition of interest groups, including labor, and, to a limited extent, business, and persuaded Californians to pass his measure. It will add about $6 billion to the state's coffers each year after it takes full effect in 2013.

But even that won't be enough to balance the budget next year. More bad assumptions – about how much the state could take from local redevelopment agencies, and about how much tax the newly enriched owners of Facebook would be paying the state – mean that there's still a $2billion shortfall looming in the fiscal year that begins next July 1.

But that gap is tiny compared with the scope of the problem that legislators and the governor have been dealing with. And California's usually sober legislative analyst has projected that in the year after next, a small surplus will sprout. And grow.

By 2018, the analyst says, current spending and revenue trends will combine to produce annual surpluses in the $9 billion range. And that's after paying for caseload growth in health and public assistance programs, more inmates in the prison system and cost-of-living increases for the schools. In fact, the five-year estimate shows school funding growing by $13 billion even though enrollment will be essentially flat.

The biggest risk to this forecast comes from Washington, D.C. While steady employment growth, solid export numbers and new life in the housing industry suggest that California's economy is on the mend, most experts agree that the national economy will fall back into a recession if Congress and President Obama do not reach an agreement on the federal budget. If they don't, on Jan. 1 a series of tax increases and spending cuts are scheduled to take effect that could smother the weak recovery that's under way.

But if the economy does continue to recover, then California lawmakers and the governor will have to decide how to deal with surpluses beginning around this time next year.

One option would be to set some money aside in a rainy day fund, beginning with the 3 percent annual shift required by Proposition 58, approved by voters in 2004. A healthy reserve would be especially important for two reasons.

First, the taxes voters approved this month are largely targeted at the wealthy, and history shows that revenue from that source is highly volatile. If the economy does slump again in the next five years, the state's tax collections will dive even more dramatically than they have in the past.

Second, those same taxes are temporary. The sales tax increase expires in four years and the income tax increase is scheduled to go off the books in 2018. If lawmakers build a lot of new spending into the budget now, they will all but guarantee a deficit later, when the tax increases expire.

Other options for spending the money: paying down debt, of which the state still has plenty, shoring up the underfunded public employee retirement systems, and beginning to set money aside to pay for billions in retiree health care costs.
But these are questions for another day, or another year.

The state is still looking at a very real deficit in the coming year, and projections of surpluses on the horizon, while more realistic than ever before, remain little more than the best educated guesses of the people who are paid to peer into economic crystal balls.

Daniel Weintraub has covered California public policy for 25 years. He is editor of the California Health Report at www.healthycal.org

http://www.ocregister.com/news/spending-378750-tax-year.html

Report: We're in the midst of a housing recovery



2012-11-27T11:54:00Z2012-11-27T14:30:15Z
Report: We're in the midst of a housing recoveryLily LeungNorth County Times
21 hours ago • Lily Leung

San Diego home prices in September rose 4.1 percent from a year ago, the biggest year-over-year gain we've seen for any month in the past two years, says a widely watched home price index released Tuesday.
That stat adds further evidence that we may be in the middle of a housing-market recovery, based on numbers from the S&P/Case-Shiller Home Price Index, a national indicator that has a two-month lag because it tracks repeat sales.

The last time San Diego saw such a significant year-over-year jump in home prices was in September 2010, when the gain was 5 percent. On a month-to-month basis, the county closed out this September with a 1.4 percent gain, which marks eight straight months of either flatness or increases.

Related: Check out the U-T San Diego's home price app
Homebuying typically slows down by fall. But not this year. Sales in San Diego County rose nearly 13 percent from September to October, as inventory continues to wane and demand, especially among first-time buyers and investors, stays strong.
Potential buyers in certain ZIP codes are fighting for a limited supply of homes, sparked by fewer foreclosures and a high share of underwater homeowners who can't put their homes on the market, said Norm Miller, real estate professor at USD's Burnham-Moores Center for Real Estate.
Roughly 5,300 homes are on the market in San Diego County, half of what we saw just a year ago. Inventory has been dropping for more than a year.
What's largely missing in local inventory are foreclosures that will eventually be resold in the market. The number of homes that have been repossessed by the banks totaled 498 in October, down more than 25 percent from the same time a year ago and down 75 percent from the peak of 2,004 recorded in July 2008.
The tight inventory level has pushed would-be buyers in certain areas to broaden their searches as well as upbid each other, which drives prices up. Record-low mortgage rates, now at 3.31 percent for a 30-year fixed mortgage, also have helped fuel demand for housing.
"The distress keeps declining," Miller said. "We're seeing higher median prices because of that. That's good. We're going to see some modest price appreciation. But there are still a lot of underwater people who are not coming into the market."
Related: Do homebuyers stand a chance in tight market?
Another reason listings are lower than normal is that a significant share of homeowners with mortgages are underwater, meaning they owe more on their homes than their properties are worth. Local estimates of borrowers who are underwater range from 25 percent to 33 percent, but experts generally agree we are in better shape than a year ago.
Miller sees another encouraging sign: slowly growing inventory in the entry-level market of the $200,000 to $299,999 range. He says the available supply here is at four months, which is considered normal to strong and has been slowly increasing from two months ago. Emphasis on slowly.
"Some people are testing the market and are coming back," Miller said. "You will continue to see that in the next few months."
On a national level, values have been on the rise for the past six months. In September, prices either stayed relatively flat or increased in all 20 major areas in the index when compared to August figures. Based on a year-ago basis, prices rose in all of those areas except for two: Chicago and New York, where prices fell 1.5 percent and 2.3 percent, respectively.
Phoenix, once the poster child of the recession, has been the leader in the housing recovery. It logged the highest year-ago price change, at 20.4 percent.
"With six months of consistently rising home prices, it is safe to say that we are now in the midst of a recovery in the housing market," said David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices.
Have story tips, a hot property listing or a question? Email me: lily.leung@utsandiego.com |
http://www.nctimes.com/news/local/sdcounty/report-we-re-in-the-midst-of-a-housing-recovery/article_1a1e3e2a-a518-56b7-be87-fd5a920bc1ba.html

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California Finds Economic Gloom Starting to Lift

Sam Hodgson/Bloomberg News

Prosperous coastal places like La Jolla, here, are better off than the state as a whole; many inland areas still have high jobless rates.

By ADAM NAGOURNEY
Published: November 27, 2012

LOS ANGELES — After nearly five years of brutal economic decline, government retrenchment and a widespread loss of confidence in its future, California is showing the first signs of a rebound. There is evidence of job growth, economic stability, a resurgent housing market and rising spirits in a state that was among the worst hit by the recession.

• Graphic: Recovering, but at Different Paces

Gov. Jerry Brown scored political success with passage of a tax increase that has improved the state’s budget outlook.


The New York Times

California reported a 10.1 percent unemployment rate last month, down from 11.5 percent in October 2011 and the lowest since February 2009. In September, California had its biggest month-to-month drop in unemployment in the 36 years the state has collected statistics, from 10.6 percent to 10.2 percent, though the state still has the third-highest jobless rate in the nation.

The housing market, whose collapse in a storm of foreclosures helped worsen the economic decline, has snapped back in many, though not all, parts of the state. Houses are sitting on the market for a shorter time and selling at higher prices, and new home construction is rising. Home sales rose 25 percent in Southern California in October compared with a year earlier.

After years of spending cuts and annual state budget deficits larger than the entire budgets of some states, this month the independent California Legislative Analyst’s Office projected a deficit for next year of $1.9 billion — down from $25 billion at one point — and said California might post a $1 billion surplus in 2014, even accounting for the tendency of these projections to vary markedly from year to year.

A reason for the change, in addition to a series of deep budget cuts in recent years, was voter approval of Proposition 30, promoted by Gov. Jerry Brown to raise taxes temporarily to avoid up to $6 billion in education cuts.

“The state’s economic recovery, prior budget cuts and the additional, temporary taxes provided by Proposition 30 have combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges,” the report said. “Our economic and budgetary forecast indicates that California’s leaders face a dramatically smaller budget problem in 2013-14.”

And 38 percent of Californians say the state is heading in the right direction, according to a survey this month by U.S.C. Dornsife/Los Angeles Times. For most places, that figure would seem dismal. But it is double what it was 13 months ago.
California’s recovery echoes a rebound across much of the country; the state suffered not only one of the longest downturns but also one of the most severe. Economists say the turnaround, should it continue, is a positive harbinger for the nation, given the size and diversity of the state’s economy.

Democrats here have been quick to argue that the improvements in fiscal conditions that the state is now projecting after voters approved the temporary tax increase may embolden other states, and Congress, to raise some taxes rather than turn to a new round of cuts.

Yet California still faces major problems. The economic recovery is hardly uniform. Central California and the Inland Empire — the suburban sprawl east of Los Angeles — continue to stagger under the collapse of the construction market, and some economists wonder if they will ever join the coastal cities on the prosperity train. Cities, most recently San Bernardino, are facing bankruptcy, and public employee pension costs loom as a major threat to the state budget and those of many municipalities, including Los Angeles.

A federal report this month said that by some measures, California has the worst poverty in the nation. The river of people coming west in search of the economic dream, traditionally an economic and creative driver, has slowed to a crawl.

Still, the fear among many Californians that the bottom had fallen out appears to be fading. Economists said they were spotting many signs of incipient growth, including a surge in rental costs in the Bay Area, which suggests an influx of people looking for jobs.

“I think the state is turning a corner,” said Enrico Moretti, a professor of economics at the University of California, Berkeley. He said that the recovery was creating regional lines of economic demarcation — “We are going to see a more and more polarized state,” he said — but that over all, California was emerging from the recession.

Richard K. Green, the director of the Lusk Center for Real Estate at the University of Southern California, said the foreclosure storm was beginning to subside, and fewer foreclosed homes were flooding the market. That has meant homes are selling faster at higher prices — which means fewer homeowners owe more than their house is worth.

“The most important thing is, if you look at job growth in California for the last 18 months or so, it’s been higher than average for the country,” he said.
Jerry Nickelsburg, an economics professor at the Anderson School of Management at the University of California, Los Angeles, said the resurgence in coastal communities was spreading, if haltingly, to struggling inland communities, creating jobs for long-distance commuters who live in places like the Inland Empire.

In one sign of a new spirit, some Californians are again promoting the idea of their state’s setting the cultural and policy pace for the rest of the country, a meme that, if ever true, appeared at least questionable as California endured cuts that diminished its once-great higher education system.

Rick Jacobs, the head of the Courage Campaign, a liberal advocacy group, argued that Californians, by voting to raise their taxes, set a model Washington should follow in negotiations over how to avert the so-called fiscal cliff.

“One might argue that what happened in California will set the trend for what will happen in the country, meaning that opposition to taxing the wealthy is opposition to the future,” he said.

Conservatives took a nearly opposite view, arguing that the state’s latest tax increases and its thicket of regulations would drive out businesses and people.

“I was born and raised in California; I love the state, but I think California has been going downhill for quite a while,” said Bradley R. Schiller, a professor of economics at the University of Nevada in Reno. “The ignorance of voters is appalling, not to see their own self-interest in restoring their state.”

California has faced attacks by conservative leaders for much of this presidential election year, as they presented the state as a model of Democratic policies gone awry. Mitt Romney compared California to Greece. Peggy Noonan declared that the “mythic place where Sutter struck gold” had become a symbol of failure.

“California is going down,” she wrote. The conservative Manhattan Institute devoted an 8,500-word report to “The Great California Exodus.”

Gray Davis, a former Democratic governor, noted that voters had approved initiatives to begin repairing a notoriously dysfunctional government. It no longer takes a two-thirds vote of the Legislature to increase spending (the requirement remains for tax increases), and a nonpartisan election system went into effect this month.

“It’s a fair criticism, but somewhat antiquated,” Mr. Davis said. “Help has arrived.”

“We’ve been used to being beat up by the Eastern Seaboard for a very long time,” Mr. Davis said. It was, he said, a case of coastal envy: “I can see the sun glistening off the ocean as I look out my office window.”

Joe Mathews, a co-author of “California Crackup: How Reform Broke the Golden State and How We Can Fix It,” said California’s main challenge was its governing structure.

“There’sa great history of trashing on us,” he said. “Just the same way people like to talk bad about the prettiest girl in school. As badly governed as we are, we have our strengths: in trade, venture capital, in weather.”

“There is reason to feel better for the state,” Mr. Mathews said. “I think the economy is coming back.”

Yet the surest sign of a resurgent California might have been captured by observant Twitter posters last week in Southern California. There, Mr. Romney — he of California-is-Greece fame — was spotted one day at Disneyland and another pumping gasoline into his S.U.V. before returning to his beachfront home in San Diego to celebrate Thanksgiving week.

http://www.nytimes.com/2012/11/28/us/california-shows-signs-of-resurgence.html?pagewanted=all