1. LAO California’s Budget Outlook for 2010-11 Michael Cohen Legislative Analyst’s Office April 23, 2010 www.lao.ca.gov

2. LAO Recap of the 2009-10 Budget  Addressed $60 billion problem over February and July packages Revenue estimates reflected slow recovery  Most solutions were short term Temporary taxes and budget reductions Heavy reliance on federal stimulus funds and deferrals  Some solutions had optimistic savings estimates

3. LAO Large Budget Problem Returns  LAO, November 2009: $20.7 billion  Department of Finance, January 2010: $18.9 billion  Similar assessments: Economy showing some improvement and revenue forecast was in the right ballpark Inability to achieve budgeted solutions is the key problem

4. LAO Modest Growth Expected During Recovery (Percent Change From Prior Quarter [Annual Rate] U.S. Real Gross Domestic Product)

5. LAO Governor’s Budget  Spending-Related Solutions: $7.6 billion Proposition 98, state employees, health, social services, and corrections  Fund Shifts and Other: $4.5 billion Gas tax swap, ballot measures  Federal Funds and Flexibility: $7.9 billion “Trigger” reductions and revenues if federal funds not received

6. LAO Legislative Action to Date  Package of Special Session bills Gas tax swap is key component ($1.1 billion) Assumption of additional revenues from sale of EdFund and state buildings ($450 million) Other items ($350 million) Cash deferrals  Remaining issues expected to be covered through normal budget process

7. LAO State’s Cash Situation Better Than A Year Ago...  March/April 2010 period was manageable December through March revenues stronger than Governor’s budget assumed  Treasurer was able to issue general obligation bonds

8. LAO... But More Cash Deferrals Will Start in the Summer  Deferrals put in place for schools, universities, cities, and counties  City and county deferrals: Highway Users Tax: $50 million each month Proposition 63 mental health: $300 million Other programs  Limited to 3 periods throughout the year  Combined with other deferrals, can not exceed $1 billion at any time  State has flexibility to modestly shift timing

9. LAO Challenges in Addressing 2010-11 Budget Problem  Solutions are on top of actions already taken  Numerous legal risks  Federal funds came with strings attached

10. LAO Budget Problem Will Persist— Huge Operating Shortfalls Projected Over Next Few Years General Fund (In Billions)

11. LAO Longer-Term Budgeting: Fiscal Liabilities Will Constrain State  Budget-Related: About $35 Billion  Retirement-Related: $100 Billion to $135 Billion  Infrastructure-Related: About $70 Billion 11

12. LAO Projected Debt-Service Ratio

13. LAO Budget Reform Issues  Legislature Is Considering a Wide Array of Possible Changes in Its Operations: Two-year budget Performance or outcome-based budgeting Program oversight Reserves 13