In Fitch's view, the fiscal 2014 budget released by California's Governor Brown on May 14 would continue the disciplined approach to fiscal management shown by the state in recent years, with a prudent revenue forecast and restrained spending growth proposed.

In March, Fitch recognized the improvement in California's fiscal management by revising the rating outlook on the state's A-minus rated GOs to positive, noting at the time that rating improvement would be contingent on sustained budgetary discipline.

State revenues and cash flow have benefited from very strong personal income tax (PIT) collections since January 2013, as taxpayers accelerated income into 2012 ahead of the 2013 federal rate increases. In Fitch's view, the proposed budget responsibly assumes that the PIT gain is a one-time shift of collections from fiscal 2014 into fiscal 2013.

The state's economic outlook cautiously forecasts that the expiration of the federal payroll tax holiday and federal sequestration cuts will have a modestly negative impact on personal income and consumer spending trends and associated tax revenues.

The budget proposes lower spending in fiscal 2014 than the January proposal and would continue to pay down budgetary borrowing. There are no significant restorations for programs that were cut in recent years and the proposal applies some of the unexpected PIT collections to accelerating repayment of school deferrals in fiscal 2013.

Major policy changes are proposed in several areas including reforming the school funding formula and implementing federal healthcare reform by shifting spending for human services and health between the state and counties.

The legislature is considering the governor's proposal and is expected to enact a budget before the start of the new fiscal year on July 1.

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