California agency projects $7 billion surplus next year

"With more than a decade of economic expansion, coupled with deliberate legislative action to put the budget on better footing, the California budget is in good condition," the report says.

But the size of the surplus depends on whether the Trump administration lets California tax the groups that manage the state's Medicaid plans. The tax is expected to generate about $2 billion, but it requires federal approval.

That's not a sure thing, given the state's feud with the federal government. Democratic Gov. Gavin Newsom stoked those fires on Wednesday.

"President Trump talks a lot about America's economic growth under his presidency, but when you look behind the numbers, you see it's California's growth that has provided the economic rocket fuel for the nation," Newsom said. "The federal government would be wise to look to California as a model for how to get its fiscal house in order."

The analyst's office warned risks of an economic slowdown are "higher than normal," pointing to weaknesses in housing markets, trade activity, new car sales and business startup funding.

"This does not necessarily mean a broader economic slowdown is imminent in the near term," the report said. "Nonetheless, there likely is greater risk in the economic outlook for 2020-21 than in previous budget cycles."

The analyst's office advised lawmakers to not spend more than $1 billion of the surplus on ongoing programs.

California's tax revenue has soared since 2012. Unemployment dipped below 4% last month for the first time under the state's methodology introduced in the 1970s, and the scarcity of jobs has caused employers to increase wages to attract workers. From 2012 to 2017, California wages increased 4% per year on average when adjusted for inflation.

California had a record $21.5 billion surplus in the state budget last year. Newsom and the Democratic-controlled state Legislature spent more than half of that money on paying down debts and boosting reserves. About $4 billion of it went to support ongoing programs while the rest was used for one-time projects.

But the analyst's office expects that wage growth to slow down, which would affect the state's personal income tax collections, the largest source of the state's money. The analyst's office now expects individual income tax collections to grow more slowly than they did two years ago.

The analysis gives the public the first glimpse of how much money California lawmakers will have to spend next year. Newsom must present his budget proposal to the state Legislature no later than Jan. 10. Lawmakers must pass an operating budget by June 15.