By Robin Respaut
(Reuters) - California's state budget will accumulate more than $4 billion of reserves in the next two years, the budget watchdog estimated on Wednesday, a sign of significant progress for the debt-ridden state.
California's Legislative Analyst's Office said much of the extra money would most likely go toward education, the state's rainy day fund, and potentially paying down liabilities.
For fiscal year 2014-2015, the office anticipated $2 billion more in revenues than expected in the state's budget act. The increase would be fully offset by higher spending on schools and community colleges, as mandated by Proposition 98.
Then, in fiscal year 2015-2016, unless there are calls for new spending, the agency expects to see $4.2 billion in total reserves, of which $2 billion would be deposited in the state's rainy day fund and another $2 billion could be spent on debt payments.
California has about $87 billion of general fund-supported outstanding bonds and billions more in unfunded liabilities. The state could enjoy future surpluses and grow its reserves, but not if the stock market drops or the economy slows, the LAO warned. The agency recommended that the legislature continue to make progress in building up reserves.
California has recently enjoyed a string of financial good news. Revenue collections are up, and the state ended last fiscal year with a surplus in the general fund for the first time since 2007.
The boost in rainy day fund savings, as mandated by the new Proposition 2 passed this month, is a credit positive for California. Standard & Poor's Ratings Services quickly responded to the passage of the proposition on November's ballot, a measure that required the state to use extra revenues for rainy day funding and to pay down liabilities, by upgrading California's general obligation bond rating to A+ from A.
(Reporting By Robin Respaut; Editing by David Gregorio)