Good, bad, good news about next year's state deficit

Good news is that the projected shortfall is way, way lower than the $16 billion gap that California faced earlier this year. Bad news is that the deficit is still running nearly $2 billion through the end of the next fiscal year. Good news is that once this red ink is dealt with, the state could see surpluses, according to the Legislative Analysts Office. From the San Jose Mercury:

The projections take into account all revenues that are expected to come in from Proposition 30, the governor's tax hike, and Proposition 39, the measure that closes the loophole for out-of-state businesses. "This outlook differs dramatically from the severe operating deficits we have forecast in November Fiscal Outlook reports over the past decade," the report said. "We also assume -- as the state's recent economic forecasts have -- that federal officials take actions to avoid the near-term economic problems associated with the so-called fiscal cliff. "If, however, a steady economic recovery continues and the Legislature and the Governor keep a tight rein on state spending in the next couple of years, there is a strong likelihood that the state will have budgetary surpluses in subsequent years."

Keep in mind that these numbers do not take into account the massive unfunded liabilities related to the state's pension system. Those liabilities are said to total $150 billion. From the LAO report:

A key priority of the state in this regard probably should be a funding plan to address CalSTRS' unfunded liabilities. Additional funding from the state, districts, and/or teachers of over $3 billion per year (and growing over time) likely will be required to keep CalSTRS solvent and retire its unfunded liabilities over the next several decades. Under a resolution approved by both houses of the Legislature this year, CalSTRS will submit several proposals in February 2013 for how to better fund the system in the future. Assisting UC in rebuilding the funding status of its pension system is another possible priority for surplus funds. Addressing these unfunded liabilities sooner likely would save state and local funds, compared to the costs of funding them down the road. This is because contributing funds to the pension systems sooner means that the systems can invest the funds and generate investment returns earlier than would otherwise be the case.