1. January 27, 2010

2. Identifies a $19.9 billion budget deficit, consisting of a $6.6 billion shortfall in 2009-10, a $12.3 billion shortfall in 2010-11, and rebuilding the reserve of $1.0 billion Various factors have contributed to budget deficit: Anticipated revenues are lower ($3.4B) Expiration of temporary budget solutions, inability to implement prior solutions, effects of adverse court decisions ($7.2B) Population and caseload growth ($1.4B) Governor has declared a fiscal emergency and has called Legislature into Special Session 2

3. 3 Budget proposes a combination of spending reductions, alternative funding, fund shifts and additional federal funds to close budget gap If federal flexibility and funding do not materialize, then additional spending reductions, delays in tax cuts, continued suspension and reduction of tax credits must go into effect While the state does not face as serious a cash shortfall as it did 12 months ago, action is necessary this spring to ensure that the state has adequate cash resources

4. 4 % Total 2009-10 Projected Deficit $(6.9)34.7% Revenue Decline (3.4)17.1% Expiration of temporary solutions, inability (7.2)36.2% to implement prior solutions, court decisions Population and Caseload Growth (1.4)7.0% Rebuild Reserve (1.0)5.0% Projected Budget Shortfall as of 6-30-2011 $(19.9) % Total Expenditure Reductions $8.542.7% Federal Funds 6.934.7% Alternative Funding 3.919.6% Other Revenues.6 3.0% Total Budget Solutions $19.9 Projected Budget Shortfall Proposed Budget Solutions

5. $8.5 Billion in Proposed Spending Reduction 5 2.9BHealth and Human Services 2.5BK-14 Education and Child Development 1.6BState Employee Compensation Reduction (5%) 1.2BCorrections and Rehabilitation 300MOther Programs

6. $6.9 Billion in additional Federal Funds - Assumes receipt of American Recovery and Reinvestment Act (ARRA) funding for Health and Human Service Programs ($2.1B) - Increased federal share of Medi-Cal costs ($2.5B) - Increased federal funding for special education ($1.0B) - Increased funding of costs of incarcerating undocumented immigrants in California prisons ($900 million) 6

7. $3.9 Billion in Alternative Funding - Complicated transportation tax swap that eliminates gasoline sales tax and raises the excise tax on gasoline and diesel fuel ($1.0B) - Use of proposition funds (not yet voted on by electorate) rather than General Funds for children’s programs and mental health services ($1.1B) - Redirect county health and social services savings ($500 million) 7

8. $600 Million in Other Revenues - New 4.8% surcharge on all residential and commercial property insurance 8 $19.9 Billion TOTAL OF ALL SOLUTIONS

9. 9 While the estimate of the budget problem as contained in the Governor’s Budget is reasonable, the inability to achieve 2009 budget solutions, several major court cases, and overly optimistic revenue projections could add a few billion dollars to the budget problem There are significant legal risks for some budget solutions such as state employee compensation reductions, and those concerning health, transportation and social services If voters again reject propositions concerning children’s programs and mental health services, alternatives would need to be identified

10. 10 Over one-third of the Governor’s budget solutions are dependent on additional federal funding for California. While some additional federal funding and flexibility is reasonable, securing all the relief the Governor seeks is unlikely If the $6.9 billion in federal funds sought by the Governor is not on the way by mid-July, additional expenditure reductions and revenue increases will be triggered: 1.$3.8 billion in expenditure reductions including the elimination of social service programs (CalWORKS, IHSS, Healthy Families), and an additional 5 percent state employee salary reduction. Also the elimination of enrollment funding for the UC and CSU ($60.6M for CSU) 2. $2.3 billion in revenue increases including an extension of business tax changes relating to net operating losses, and an extension in the reduction in dependent tax credit 3. $800 million further funding of mental health services from proposition funds that requires voter approval

11. 11 Governor’s Budget for 2010-11 makes higher education a priority and represents a positive starting point for the CSU Proposes to restores $305 million ($255 + $50) of the $571 million that was reduced from CSU budget in 2009-10. If this restoration survives, there would be a smaller enrollment reduction than currently contained in our planning parameters This funding is NOT contingent on the receipt of additional federal funding BUT must be approved by the Legislature Proposes to increase funding by $60.6 million for reinstatement of enrollment This funding IS contingent on the receipt of additional federal funding of $6.9 billion for programs outside higher education

12. 12 If either of the funding proposals ($305M and/or $60.6M) survives the legislative process, it would mean a lesser budget cut and enrollment reduction than we are currently planning but it would not eliminate all budget cuts for FY 2010- 11

13. 13 Proposed constitutional amendment that would cap state spending for prisons and require minimum spending levels for higher education: Beginning in 2011-12, monies saved from reducing prison spending would be transferred to higher education Beginning in 2014-15, prison spending cap at 7% and at least 10% of General Fund spending to higher education LAO strongly advises Legislature to reject this constitutional amendment. “It is an ill-conceived, autopilot budgeting measure that would unwisely tie the budgetary fates of two very different state programs.”