SAN FRANCISCO, Jan 14 (Reuters) - California's spending and revenue are "roughly in balance," the state's budget watchdog said on Monday in a report reviewing the budget plan which Governor Jerry Brown unveiled last week.
The Democratic governor on Thursday delivered some rare good news in his spending plan for the state's fiscal year beginning in July, saying California's budget deficit is gone after years of financial troubles, which allows for increased spending on education and healthcare.
The report by the Legislative Analyst's office also struck an optimistic tone.
"Over the past several years, each January Governor's budget has included billions of dollars in proposed solutions - expenditure reductions, revenue increases, borrowing and other actions - in order to close budget shortfalls," the report said. "Now, however, the state has reached a point where its underlying expenditures and revenues are roughly in balance."
"With the exception of education funding, the remainder of state General Fund spending reflects a baseline budget," the report added. "This means that state-supported program and service levels established in 2012-13 generally continue 'as is' in 2013-14. Under our and the administration's fiscal forecasts, this situation would likely continue into 2014-15."
A report by the Legislative Analyst's Office in November predicted the government of the most populous U.S. state would face a $1.9 billion budget gap in its next fiscal year instead of the surplus Brown expects.
The office's report on Monday also applauded Brown's vow to hold down most state spending. Some Democrats would like to increase spending after years of steep cuts. Democrats gained a supermajority of seats the legislature in November and can override Republican attempts to block bills for tax increases.
"The governor's emphasis on fiscal discipline ... is commendable, especially in light of the risks and pressures that the state still faces," the report said.
"We note that there are still considerable risks to revenue estimates given uncertainty surrounding federal fiscal policy and the volatility inherent in our revenue system," the report added.
Brown said California has to hold down most spending due to uncertainty about the direction of talks in Washington over the federal budget and the economic recovery. He also is concerned about potential increases in healthcare costs and lawsuits that could block parts of the state budget.
Under Brown's budget plan, spending in the upcoming year is set to rise $4.7 billion from the current 2012-13 budget. Schools and universities will get a $4 billion boost, health spending will rise $1.2 billion, while transfers to local governments will drop $2.1 billion.
Brown also wants to put $1 billion in a rainy-day fund, pay down internal loans used to help close budget gaps over the past decade and put the state in a position where it can post surpluses in future fiscal years.
While California's finances appear to be stabilizing, in part thanks to tax increases approved by voters in November, the state will still face serious budget challenges, the Legislative Analyst's Office said in its report.
The report said California would have a slim reserve following the next fiscal year under Brown's plan, noting the state "would still have no sizable reserve at the end of 2016-17 and would not have begun the process of addressing huge unfunded liabilities associated with the teachers' retirement system and state retiree health benefits."
"As such, the state faces daunting budget choices even in a much-improved fiscal environment," the report said.