LAO

California’s Fiscal Outlook

Legislative Analyst’s Office

www.lao.ca.gov

LAO

Tax Revenues Rising AgainMajor General Fund Tax RevenuesIn Billions

50

60

70

80

$90

99-00 00-01 01-02 02-03 03-04 04-05 05-06

BudgetForecast

LAO

…But Structural Shortfall Remains

Forecas t

OperatingSurplus

Annual Revenues and Expenditures

60

70

80

90

100

110

$120

99-00 01-02 03-04 05-06 07-08 09-10

OperatingDeficits

RevenuesExpendituresAlternative Expendituresa

LAO

One Key Reason—Lots Of Budget BorrowingRepayment Of General Fund Budget-Related Debt(In Billions)

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

$4.5

2004-05 2005-06 2006-07 2007-08 2008-09

Special Funds

Local Government/K-12 Education

Budget-Related Bonds

LAO

Recent Productivity Growth At All-Time HighAnnual Average Increase inU.S. Nonfarm Business Productivity

1.0

2.0

3.0

4.0%

1950-54 1960-64 1970-74 1980-84 1990-94 2000-04

Long-Term Average 2.3%

LAO

California Jobs:Pre-2004 BenchmarkYear-to-Year Percent Change, by Month

-3

-2

-1

0

1

2

3

4%

Household Survey

Payroll Survey

2001 2002 2003 2004

LAO

California Jobs:Post-2004 BenchmarkYear-to-Year Percent Change, by Month

-3

-2

-1

0

1

2

3

4%

Jan-2005

Household Survey

Payroll Survey

2001 2002 2003 2004

LAO

California Home Construction To Remain StrongPermits for New home ConstructionIn Thousands

50

100

150

200

250

1997 1999 2001 2003 2005 2007

Multiple Units

Single Units

Forecast

LAO

PIT Liabilities on ReboundIn Billions

10

20

30

40

50

$60

1999 2000 2001 2002 2003 2004 2005 2006 2007

Capital Gains and Stock Options

PIT Liabilities From:

Other Sources

Forecast

LAO

California Profits Have Been BoomingAnnual Percent Change in California Taxable Corporate Profits

-15

-10

-5

0

5

10

15

20

25%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Forecast

LAO

Proposed Solutions in 2005-06 Governor’s Budget

Program Savings

Loans

Fund Shifts

Revenues

LAO

The Legislature’s Budget Opportunity

Healthy Revenues $2.2 billion more than Governor

Ongoing 2005-06 Solution $4 billion to $5 billion—

similar in magnitude to budget

The Building Blocks:

LAO

The Payoff of Acting Now:

2005-06 Balanced, With Solid Reserve

2006-07 Close, Using Remaining Bonds

Out-Year Problem Persists, But Smaller

LAO

2005-06 Precariously Balanced

Major Shortfalls in 2006-07 and Beyond

Close to $10 billion

The Price of Inaction:

LAO

General Fund Operating Shortfalls, Under Alternative Scenarios

-12

-10

-8

-6

-4

-2

$0

2004-05 2005-06 2006-07 2007-08 2008-09

(In Billions)

Governor's Budget

Without Ongoing Solution