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California analyst projects $2.8 billion budget surplus

File: California Gov. Jerry Brown at a Los Angeles news conference in 2012. Kevork Djansezian/ Getty Images

California's nonpartisan legislative analyst said Wednesday he's forecasting a $2.8 billion budget surplus next year and says California should be able to weather a mild recession without major budget cuts or tax increases over the next four years.

Legislative analyst Mac Taylor's annual budget outlook sets the stage for negotiations that begin in January when Democratic Gov. Jerry Brown releases his proposed spending plan.

Taylor's office said the forecast is subject to significant uncertainty, particularly in future years, but it is the best estimate based on available economic indicators.

The projected surplus signals a likely showdown between Brown, who prefers cautious spending growth to prepare for a recession, and Democratic legislators eager to expand state services for people in need.

Brown's administration urged caution in the face of sluggish state revenue in the summer and fall. October tax collections were $381 million, or 4.7 percent, below projections. Revenue is $1 billion below projections since the administration's most recent forecast in May.

"With what we know now, the outlook for the upcoming budget is concerning and will need to account for this declining revenue and the significant uncertainties that the analyst has identified today — including stock market performance, the potential for recession, and changes in federal policy," Michael Cohen, Brown's director of finance, said in a statement.

The legislative analyst said his projection accounts for ballot measures approved by voters, including the extension of a temporary tax increase on the wealthy. It does not reflect changes in federal spending that may come from President-elect Donald Trump and the Republican-controlled Congress.

If all spending commitments remain unchanged, Taylor projects that California would finish the next budget year in June 2018 with $11.5 billion in total reserves. Most of it would go to required deposits in the state's rainy-day fund, but about $2.8 billion would be available for the Legislature to spend or save as it chooses.

In future years, Taylor projected two scenarios. Assuming economic growth continues apace, he says California would likely have a budget surplus in each of the next four fiscal years. If there's a mild recession beginning in the middle of 2018, he estimates that the state's reserves would be sufficient to cover almost all deficits.