The California Legislative Analyst’s Office’s recent forecast of state revenues and expenditures is a credit-positive development for the state, Moody’s Investors Service said Monday.
After years of deficits, projections for the fiscal year ending June 30, 2015 showed a surplus of more than $6 billion.
“The scale of the surplus points to California’s economic strength, deep wealth and ability to tap stock market gains through income taxes,” Moody’s analyst Emily Raimes wrote in a report.
The LAO, a non-partisan agency providing fiscal and policy advice to the California state legislature, releases a fiscal outlook report on the state each November.
In its projections last year, the LAO predicted that the state would have a small deficit in fiscal 2013 and a larger deficit in fiscal 2014. Since then, the economic and fiscal situation in the state has improved significantly and the LAO now projects a surplus of more than $3 billion in 2014, and more than $6 billion in fiscal 2015.
“These surpluses are a significant improvement from prior years,” Raimes said. “California had ended every fiscal year between 2008 and 2012 with a deficit. The fiscal 2013 surplus ends that trend and signals the extent to which the state’s finances have turned a corner.”
The LAO’s forecast for personal income taxes was revised upward after stock market growth was higher than expected in recent months. Its economic forecast was also revised upward largely based on the state’s housing recovery and improving job markets.
Although the improving economy, stock market, and tax increases boost the state’s fiscal situation, higher revenues are also an outcome of the state’s volatility in revenue collections.
California has a highly progressive personal income tax structure and taxes capital gains at the same rate as other income. As a result, a large portion of the taxes received are paid by a small portion of high-income taxpayers, leading to a higher level of revenue volatility relative to other states.
“Although a surplus forecast is a positive for the state, the state will need the reserves to cushion it from the next economic downturn, when the volatility is likely to result in steep revenue declines,” Raimes said.