Report: California in Good Fiscal Shape With Expected $7 Billion Surplus

(CN) – A decade after an economic recession brought California to its knees, a report released Wednesday shows the Golden State is in good fiscal shape and will have a $7 billion surplus next year.

The California Capitol building.

According to a fiscal outlook report released by the nonpartisan Legislative Analyst’s Office, California will bring in the surplus for the Legislature to use for next year’s budget and has a $22 billion rainy day fund.

California Governor Gavin Newsom, a Democrat, pointed to the report as proving the enormity of the state’s economy.

“California is now the fifth-largest economy in the world. Our state is proving what big-hearted, progressive governance can look like – all without breaking the bank,” Newsom said in a statement Wednesday. “President Trump talks a lot about America’s economic growth under his presidency, but when you look behind the numbers, you see that it’s California’s growth that has provided the economic rocket fuel for the nation.”

Newsom has his predecessor, former Democratic Governor Jerry Brown, to thank for the surplus.

In 2009, then-Governor Arnold Schwarzenegger, a Republican, oversaw a state described as “ungovernable” as its S&P rating dropped a grade and unemployment shot to 12.2%. The following year the proposed budget saw a $19 billion shortfall.

Following the economic recession, Brown built up the state’s surplus with the voter-approved Rainy Day Budget Stabilization Fund Act and passed a series of measured budgets over his two terms in office.

The analyst office’s report, which forecasts the economic conditions the state could face in the coming year, found California is experiencing record fiscal health.

“With more than a decade of economic expansion, coupled with deliberate legislative action to put the budget on better footing, the California budget is in good condition,” the report states.

In an email, state Senator Holly Mitchell, who chairs the Committee on Budget and Fiscal Review, said the fiscal outlook is a good reminder to “continue our responsible budgeting practices in order to protect the state’s most vulnerable populations.”

She added, “Being cautious and taking a prudent approach have been part of our deliberative process for the last few budget cycles.”

While there have been signs of a weakening economy in the last six months in the state’s slowing housing and automobile markets, it’s no guarantee of an economic downturn.

Every year, the Legislative Analyst’s Office considers several possible scenarios, including those for steady economic growth or a mild recession.

One concern the report mentions involves the reauthorization of the managed care organization tax, a policy that offsets some health care costs. The policy awaits approval from the Trump administration, leaving $900 million up in the air.

“The state now is in good shape to weather a recession typical of the post-WWII era. This does not mean, however, that the state is prepared to weather any possible recession,” the report found.

The analyst’s office cautions lawmakers to use no more than $1 billion of the $7 billion surplus in the 2020-21 budget year.

“Moreover, because there are signals suggesting the potential for weaker economic performance than our outlook currently assumes, we suggest the Legislature allocate a significant portion of the surplus toward building reserves and paying down debt,” the report states.

Newsom said the U.S. and California face “uncertain economic headwinds” going into 2020.

“As Washington soaks Americans with a trillion dollars in debt to pay for tax cuts that benefit the wealthy and destroys the social safety net, our state is now doing more than ever before to provide opportunity for all California families, especially those who are not equally sharing in our nation’s prosperity,” Newsom said.

In October, a panel discussion on poverty hosted by the Public Policy Institute of California said California is hurtling toward a recession.

Poverty in the Golden State remains high despite one of the longest periods of job growth over the last decade. Nearly 7 million people in the state lack resources to meet their basic needs, and as many live just above the poverty line.

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