The Californian Economy - Part 2: Analysts Predict $1 Billion Surplus for State Budget; Could Fiscal Cliff Threaten Prosperity?

After years of struggles due to the onset of the economic crisis, one of the largest-and hardest hit-states in the nation may finally be seeing some daylight for their budget situation.

Thanks to the passage of Proposition 30 at the polls on Nov. 6, the nonpartisan California's Legislative Analyst's Office is projecting a $1 billion budget surplus by the 2014-2015 fiscal year, Financial Times.com reported this week.

Like many states across the country, California was rocked by the financial crisis, mortgage foreclosures and unemployment spiking to levels much higher than the national average and budget deficits forcing the state to slash public services.

In fact, the economic situation deteriorated two years ago to the point where the state even had to offer IOUs to its creditors in lieu of cash.

However, with the recent passage of Proposition 30, which will raise taxes on families and individuals earning $250,000 or more, the proposition--which experts estimate will generate $6 billion for the state--is expected to produce a $1 billion surplus from tax revenues.

 In his Nov. 14 report on how the tax increase should improve the state government's fiscal outlook, legislative analyst Mac Taylor wrote that the state's economic recovery, prior budget cuts and the additional, temporary taxes provided by Prop. 30 have "combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges."

"For the first time since about 2001, we actually show us being in the black," Taylor adds. "This is a dramatic turnaround."

However, as the Kansas City Star reports, those numbers are depending on assumptions that few Capitol veterans expect to hold.

 Specifically, Democratic lawmakers would have to keep state programs at their current spending levels after years of forcing allies to accept cuts and no cost-of-living increases.

In addition, the projected surplus for California would need to be sustained both by steady economic growth and no broad federal tax hikes or deep spending cuts.

Meanwhile, California is facing a $1.9 billion deficit through June 2014, according to the Legislative Analyst's Office, which predicted a $13 billion gap over a comparable time period just last year; and a $25 billion shortfall in 2010.

Fiscal Cliff: Will California's economic recovery be pushed off the edge if the country goes off the cliff?

While California Gov. Jerry Brown is hailing the passage of his state's tax hike as a victory-going so far as to ask legislators in Washington to take a look at his state's willingness to pass tax hikes as they work to solve the looming fiscal cliff-not everyone is a fan of the move.

"Dramatically increasing taxes on entrepreneurs and small business owners, as Prop 30 does, is going to hasten the exodus of employers from California to other states, and the jobs and tax revenue will go with them," Darrell Issa, a Republican congressman in the state, told Financial Times.com in an email.

Speaking of the fiscal cliff, analysts and experts are not forecasting a pretty picture for the state if President Obama and Congressional leaders allow the Bush tax cuts to expire on Jan.1.

The expiration of the cuts will mean that automatic budget cuts and tax hikes will occur for millions of Americans.

Rudy Ortiz, a scientist at the University of California at Merced, which relies on federal grants, fears that going off the cliff would be devastating for the scientific community.

"It will be devastating for all science, not just biomedical research," Ortiz told the Kansas City Star in an interview. "It will set science back many years, because many young investigators that are struggling now will likely find other careers."

 The Star warns that the fiscal cliff could hit California communities hard.

"From Yosemite National Park and University of California laboratories, to the federal courthouses in downtown Fresno and Sacramento and well beyond, myriad federal operations would have to adjust. Defense contracts would be vulnerable. Grants would disappear," the Star reported.

In addition, Silicon Valley companies would be hit hard with the loss of research and developmental tax breaks, while individual tax rates go up.

The cliff could also mean the Golden State will lose $27 million in Community Development Block Grant funds for what remains of fiscal 2013, according to calculations by the Washington-based think tank Bipartisan Policy Center.

Block grants have paid for community projects such as new sewer lines, apartment rehabilitation in Merced, and city planning in West Sacramento.

In July, Stephen Fuller, an economist based in George Mason University in Virginia, projected that California would lose some 225,000 jobs through next year under federal spending cuts caused by the fiscal cliff-more than half of those numbers coming from defense cuts.

Taylor, who has warned of the ramifications for California if a deal is not reached in Washington, has projected a recovery for California that is depending largely on the assumption that President Obama and Congress will reach a deal to avoid the cliff.

Tomorrow: Part 3 of the California Economy Recovery Series will deal with "Household Pay in California - Is it Rising or Falling?"