California budget crisis turns into a big fat surplus?

California budget crisis becomes a surplus?

Budgets have been tight throughout the past few years as financial crises hit record highs and there wasn’t enough money to accommodate expenses and other government initiatives. But recent news shows that state coffers are filling up again – the state of California has an estimated $1.2-$4.4 billion surplus according to government officials and analysts, stirring up a debate on how that money should be spent.

California is among six other states that have also reported surpluses, which may come as a surprise to many given the sequester and other budget cuts that have taken place this year and in years past. Lawmakers have proposed three potential uses for this money – increase spending in areas that recently experienced tax cuts, save the money for future needs or restore programs that were cut during the recession.

Financial blogger Bill McBride recommends the state be strategic with the surplus. “With the surpluses just starting, I think tax cuts should be off the table (they are too hard to reverse if revenue falters). My suggestion would be to pay down debt (rainy-day fund) and cautiously restore some cuts,” said McBride.

A change in the tide?

After years of cuts and maxed out budgets, lawmakers are likely pleased to see that money saving strategies have resulted in more revenue than outgoing expenses. With such a substantial amount of surplus, they will have to decide how best to allocate this money in order to continue on this positive trend. Because it’s the first in so long, it’s likely that many will propose holding on to the surplus money in case the economy returns to the state that it’s been in during recent years.

But there’s another school of thought that when a business or entity has extra funding, that is the time that aggressive investments should be made in order to drive growth during a time that it can afford to take a loss and still stay afloat.

The GDP has grown by leaps and bounds in recent quarters – increasing over the past eight after taking a tumultuous drops starting in 2006. The discussions on what to do with the surplus could mean big things for areas that have received little to no recent budget allocations, so there’s no doubt that residents of California will be interested in state officials’ final decision.