California's government may actually find itself in the strange situation of having budget surpluses after the end of the next fiscal year if Congress can solve the "fiscal cliff" problem and Sacramento legislators can avoid overspending.
That's the word from the state's nonpartisan Legislative Analyst Office, which released its budget outlook Wednesday. The report predicts an improving economy, combined with voters' decision to raise their own taxes by passing Prop. 30 will lead to a sharp improvement in the state's financial health.
The predictions are not a sure thing - the analysis in part rests on assumptions that Congress will avoid pushing the national economy off a "fiscal cliff" and that Sacramento lawmakers will avoid the temptation to overspend if state revenues rise as predicted.
The Legislative Analyst also does not see an immediate end to deficits - Sacramento must solve an estimated $1.9 billion shortfall by the end of June.
The immediate deficits stem from factors including rising education spending in accordance with Prop. 98, the end of furloughs for state employees, debt service and a $626 overestimate of expected tax revenues from last year's Facebook IPO.
Those caveats aside, the Legislative Analyst's report presents a much rosier forecast than the one issued one year ago, when the outlook was a $13 billion deficit.
"This is our best budget forecast since the high-tech boom over ten years ago," Assemblyman Bob Blumenfield, D-Van Nuys said in a statement.
Partisan gridlock refers to the federal budget quandary known as the "fiscal cliff," a combination of automatic tax increases and broad-based spending cuts scheduled to go into effect next year.
The Congressional Budget Office has warned that a failure to produce a more sensible deficit reduction plan than what is currently written into law could lead to a new recession in 2013.
The question looming over California and the rest of the United States is whether President Obama and Congressional Republicans can avoid the fiscal brinkmanship of 2011, when a standoff over the national debt ceiling had some commentators wondering whether the United States would actually default on debt payments.
In his first press conference since winning another term, President Obama said his victory shows the nation is willing to impose higher taxes on the wealthiest Americans as part of a budget balancing strategy.
Allowing the so-called Bush Tax Cuts to expire next year would result in the nation's highest marginal tax rates climbing from 35 percent to 39.6 percent.
Congressional Republicans are averse to raising taxes. Republican speaker John Boehner of Ohio said that although there is a new bipartisan sensibility in Washington, he does not want to endanger job creation.
Also, Senate Minority Leader Mitch McConnell of Kentucky issued a statement calling for Democrats to accept reforms to entitlement programs as part of a budget compromise.
The fiscal cliff is out of California officials' hands, but they can decide whether or not future state budgets will avoid overspending.
The Legislative Analyst projected that a healthier economy and stronger tax revenues could lead to a $1 billion surplus by June 2015. The surplus could even rise to more than $9 billion by June 2018.
The obvious question is whether California's legislature can avoid spending that kind of money if Wednesday's predictions prove accurate.
Christopher Thornberg, founder of Los Angeles-based Beacon Economics, said a surplus can be a scary prospect, given politicians' tendency to spend as much as possible.
"We haven't had a quote unquote surplus since the 1990s, and what happened then is still having ramifications across the state," Thornberg said. "Gray Davis stepped up and gave massive pension increases to the public employee unions."
Assemblyman Mike Morrell, R-Rancho Cucamonga, had similar concerns.
"I hope we'll be cautious and wise with the money that's entrusted to us," he said.
The state Senate's top Democrat, Darrell Steinberg, issued a statement in response to the Legislative Analyst's report emphasizing Sacramento's need to save money while reversing service cuts of past years.
"This opens opportunities to plan for the future with three important goals: pay down debt, set aside resources for unforeseen economic downturns, and reinvest in public and higher education, health and human services, and public safety," he said in the statement.
The Associated Press contributed to this report.