1. LAO California’s Economic and Budget Situation Legislative Analyst’s Office

2. LAO California’s Recent Employment Woes Concentrated in High Paying Region Wage and Salary Jobs, Percent of Prerecession Peak

3. LAO …And in High Paying Sectors… Manufacturing Jobs, in Millions 1990 1 2 3 4 5 6 7 8 92000 1 2 3 1.5 1.6 1.7 1.8 1.9 2.0

4. LAO Revenues From Capital Gains and Stock Options Fell Sharply… (In Billions). 98-9999-0000-0101-0202-0303-0404-0505-06 Forecast 5 10 15 $20

5. LAO …And The State Has Yet To Resolve Resulting Imbalance General Fund (In Billions)

6. LAO 2004-05 Shortfall Facing California  Before Proposition 57—$17 Billion Assumed sale of $8.6 billion statutory bond with debt service costs of $2.5 billion Absent this bond, shortfall would have been $23 billion  After Proposition 57—$12 Billion New bond contributes $5 billion to solution  $3.7 billion from larger bond proceeds  $1.3 billion from lower debt-service

7. LAO Allocation of Governor’s Budget Solutions  Program Savings—$7.3 Billion Proposition 98—$2 billion Health/Social Services—$2.5 billion Transportation—about $0.9 billion  Loans/Borrowing—$2.6 Billion  Local Government-Related—$1.8 Billion  Transfers/Shifts/Other—$1.6 Billion

8. LAO Key Findings in LAO February Budget Review  Budget Modestly Out of Balance In 2004-05  Major Budget Threats Could Increase Shortfall  $7 Billion Operating Shortfall Projected For 2005-06  Reform Proposals Still Under Development

9. LAO Governor’s Plan Would Eliminate About One-Half of Ongoing Shortfall General Fund (In Billions)

10. LAO Why Structural Shortfall Reemerges in 2005-06  Expiration of One-Time Savings After 2004-05 Economic recovery bonds Pension Bonds Suspension of Proposition 42  Other Obligations in 2005-06 Transportation loan repayment Local mandates

11. LAO Update: Situation Has Not Improved  State Facing Higher Costs in a Number of Areas Risks became reality Deficiencies Mid-year savings not adopted  Economy/Revenue Picture Mixed California job growth still disappointing Year-to-date collections a little soft But key current indicators positive As always, April is key

12. LAO Key Budget Decisions Ahead  How Much of Ongoing Problem Should Be Addressed in 2004-05?  How Much Can Be Done on Expenditure Side?  Should Taxes Play a Role?