By Rory Carroll
SAN FRANCISCO (Reuters) - California budget reserves are expected to come in at $11.5 billion for the 2016-17 fiscal year, beating a previous estimate by $3.6 billion, thanks to higher tax revenues and a growing economy, a state budget watchdog agency said on Wednesday.
"California's state budget is better prepared for an economic downturn than it has been at any point in decades," the state's Legislative Analyst's Office (LAO) said in a report.
"Given our estimates of state revenues, expenditures, and reserves, the state can generally maintain its current policies over the outlook period even under some more pessimistic economic scenarios," the report said.
The legislature would have control over $4.3 billion deposited into the state's traditional budget reserve with the rest to be placed in a new "rainy day" fund, which was approved by voters last year, the report said.
California expects to end its 2015-16 fiscal year with $7.9 billion in reserves, a $3.3 billion increase over previous budget estimates.
If the economy continues to grow and no additional budget commitments are made, the state budget would be in surplus through 2019-20, the report predicted.
California is still vulnerable to an economic or stock market downturn, which could reduce revenues by billions of dollars below the LAO estimates.
California's economy has been shaped by market booms and busts, in part because the state's finances are heavily reliant on capital gains taxes.
If the state's two large public pension funds lower their expectations for future investment returns, state contributions to the funds could increase by billions of dollars.
"The strong economy is good news for California, but the recession scenario outlined by the Legislative Analyst is a sobering reminder that we must continue to pursue fiscal discipline," said Michael Cohen, the director of the California Department of Finance.
Senate Republican leader Jean Fuller said the strong revenue growth means there is no need to impose new taxes on California families. She called for the legislature to restore rates to MediCal providers and address the needs of the most vulnerable members of society, including the developmentally disabled.
California Assembly speaker Toni Atkins said next year's budget should focus on building up the rainy day fund and setting aside funds associated with increasing the minimum wage to $15 per hour. She will also pursue new investments in disability services, education and infrastructure, she said.
(Reporting by Rory Carroll; Editing by Diane Craft)