Moody's Investors Service said a recent less-conservative analysis of California revenues increases the likelihood the Legislature will pass a budget with higher revenues and higher spending.
"The [Legislative Analyst's Office] analysis believes that stronger-than-expected capital gains growth will continue, and could portend a budget leaving the Legislature with higher revenue and spending than anticipated," Moody's said in a note Wednesday.
The nonpartisan LAO said in a report Friday that it expects $3.2 billion more in state revenues than projected in Gov. Jerry Brown's revised budget, a surplus that it said could be used to tackle the state's debts.
"Moody's believes forecasting personal income tax revenues, particularly those driven by capital gains, is extremely difficult," the report said.
The ratings firm cited the LAO's figures that said the top 1% of California tax filers pays 40% to 50% of personal income tax revenues, and most of that money is capital gains.
In the so-called May Revision budget, released every spring after the governor's initial January spending proposal, the Brown administration forecast that weaker tax collection will erase much of the $4.5 billion of unexpected tax revenues collected since January.
The administration said that federal cuts as part of the so-called "sequestration" are likely to hit state coffers in upcoming months.
The governor's new general fund spending plan of $96.4 billion for fiscal 2014 is a 1.3% drop from his $97.7 billion proposal in January. State general fund expenditures would still be 3.6% higher than last year's $93 billion budget, driven partly by the passage of new taxes to support education.
Moody's said even though the governor's revision shows more revenue in fiscal 2013, there is little change in fiscal 2014 projections than prior budgets because it treats the jump in personal income tax revenues as a one-time event.
Ratings agencies have given mostly positive reviews to Brown's spending proposal due to an ongoing theme of fiscal restraint.
Standard & Poor's upgraded California to A from A-minus in January, and Fitch Ratings upped its outlook on the state to positive with an A-minus rating in March. Moody's Investors Service rates the state's general obligation bonds A1.
