State Gets $676-Million Windfall in Tax Surplus : Finances: Vibrant economy brings in extra revenue. But officials are cautious about spending it.
California’s economy is doing so much better than economists predicted just six months ago that state government coffers are now brimming with about $676 million in unexpected cash.
The windfall is the biggest burst of surplus tax revenue that California has seen since 1987, when Gov. George Deukmejian decided to return much of the unexpected money to taxpayers through a rebate.
This year, the state is barely four months into the fiscal year and most state officials are reluctant to begin counting their blessings. But with experts indicating that the positive trends are likely to continue, state officials are beginning to ponder a tax cut and more school funding, among other things.
“This looks to me like a keeper,” said Ted Gibson, chief economist for the state Department of Finance. “We think that the economy is in a good, solid recovery mode--better than we had reason to expect six months ago.”
The $676 million in surplus revenue calculated this week by the Finance Department is largely a result of taxes on personal income, sales and corporations that have generated more money than lawmakers anticipated when they adopted the state budget in August.
Economists say the revenue boost is basically a reflection of job creation. For the first time since the late 1980s, a recent UCLA business forecast said, California is producing jobs at a faster rate than the nation.
The state’s unemployment rate increased slightly in October after registering 7.2% in September, its lowest mark in 4 1/2 years.
What threw off the state’s economic predictions, experts say, is that the strong improvement is occurring even though two of California’s key financial categories--the aerospace and housing industries--are still suffering bad times.
In their place, experts said, the difference has been made up by a strong performance from industries such as entertainment, trade and electronics.
Bank of America economists reported last month that Los Angeles, San Francisco and San Diego counties are experiencing record-level tourism seasons. And UCLA’s report noted that employment in the entertainment industry--defined as motion pictures, amusement and recreation services--is up more than 60% since 1986.
On trade, California Secretary of Trade and Commerce Julie M. Wright said Tuesday that international business now accounts for about 25% of the state’s economy and exports are up 19% since the beginning of the year, with electronic exports up 30%.
“California’s economy . . . is well along the way in making the transformation to a new technology-driven economy,” according to the October Bank of America forecast. “Significant hurdles remain--further [military] base closures, state and local government fiscal problems, and further consolidation of some private sector industries. But today’s economy is significantly different than that of the recessionary California of a few years ago.”
The healthy forecast was reinforced Tuesday by the California Business Roundtable, which surveyed executives from 75 major state companies and reported that nearly three-quarters expect their businesses to do the same or better during the next two years.
Gibson and other state officials said it is too early to predict how much money California might expect by the end of the fiscal year in June. Most notable, he said, is that the state is awaiting to hear what revenue it can expect from the federal budget being debated in Washington.
If the state does produce a robust revenue surplus, state officials from both parties indicated that they could have similar priorities on how it should be spent.
State Senate Majority Leader Bill Lockyer (D-Hayward) said he is reluctant to speculate about how to spend the money until he is certain that it exists. Lockyer said he doubts the credibility of the Finance Department and is concerned that the budget might include unreal expectations of federal revenue.
Still, Lockyer spokesman Sandy Harrison said the senator will study the figures and keep an open mind. “If he becomes satisfied that this is a substantial recovery, then he said it would greatly enhance the chances of a tax cut or higher spending on schools or possibly both,” Harrison said.
Paul Kranhold, spokesman for Gov. Pete Wilson, said the governor has indicated in past speeches and budgets that his priorities are similar.
“We are just now in the process of putting together the 1996-97 budget proposal,” Kranhold said. “But by and large, where the governor wants most of the new revenue to go is to a tax cut, to keep this growth alive . . . and to education.”
The surplus revenue is especially good news for California schools, which would automatically receive a substantial portion of the additional revenue due to funding requirements that voters approved in Proposition 98.
The precise amount would be determined next summer based on a formula involving a number of economic factors. But state finance officials said, as a general rule, that kindergarten through high school classrooms receive about 61% of state revenue.
“It looks like it’s going to be pretty strong,” said Jim Wilson, a budget analyst for the state Education Department.
But throughout state government, agency chiefs who have suffered at least five years of financial hard times due to California’s recession are now hoping to receive the full funding they need to operate.
Wilson aides were quick to add Tuesday that the governor still plans to continue his effort to shrink the cost and size of state government based on a philosophical, if not a budgetary, incentive.
And other state officials cautioned against those who would consider the additional revenue as surplus cash. During the state’s hard times, they said, funding for several areas of the government was slashed to risky levels.
State Controller Kathleen Connell on Tuesday said she believes the state inappropriately took about $3.6 billion from dozens of special funds where the moneyis legally restricted to narrow purposes.
Special funds cover a wide range of interests, such as specific fees charged to beauticians, off-road vehicle enthusiasts or dentists that are intended to be used for regulation of those disciplines.
Lawyers representing a number of special funds have filed suit against the state for redirecting their fee revenue. Connell suggested that the state should consider using this year’s additional revenue to repay those sources.
She also noted that the state’s contingency fund, which credit rating agencies evaluate to determine if the state is prepared for unexpected costs, is too low.
“Nobody should be looking at that money and seeing money they think we should spend,” she said.
In 1987, the state’s level of unanticipated revenue reached the level it is at today in February, eight months into the fiscal year. That year, the budget ended with a revenue surplus of about $1.4 billion.
The surplus prompted Deukmejian to recommend that $1 billion be rebated to taxpayers. But the governor’s plan was highly controversial the next year when the state budget unexpectedly fell $1 billion short.
This week, state finance officials will begin preparing the budget for the 1996-97 fiscal year that begins in July. On Thursday and Friday they are planning a two-day meeting in Southern California with a number of the state’s top academic and private economists.
Based on the analyses at that conference, state finance officials will calculate revenue estimates to be used in next fiscal year’s budget that the governor will present in January.
The Finance Department will do another analysis of its budget projections in May, one month before the document is scheduled to be adopted in June.
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Coffers Brimming in California Surprise
The state Department of Finance reported this week that California has received about $676 million more in tax revenue than it had anticipated when the budget projections for the 1995-96 fiscal year were calculated in May.
WHERE IT CAME FROM:
The increased revenue comes from a variety of taxes exceeding projections:
* Personal income taxes: $261 million
* Bank and corporation taxes: $182 million
* Sales and use taxes: $151 million
* Miscellaneous receipts, including alcohol, tobacco and horse racing: $82 million
POSSIBLE USES
Just four months into the fiscal year, state officials are still reluctant to begin making decisions about how to spend a possible surplus at the end of the fiscal year. But in a government that has been strapped by more than five years of recessionary budgets, two ideas are receiving the most attention: a tax cut and increased school funding.
WHY THE SURPRISE
State economists say the revenue is unexpected because two of California’s leading economic categories--the housing and aerospace industries--are still stuck in hard times. But the received an unexpectedly healthy boost from industries like entertainment, trade and electronics.
A CAVEAT
One question mark is whether the federal budget being debated in Washington will provide California with the funding levels that were calculated into the state budget.
Sources: State Department of Finance Monthly Bulletin
