Part I: State’s Fiscal Picture

• The Governor’s Budget Proposal
• Economic Forecast—Slow Growth
• Revenue Forecast—Very Modest Growth
• Total Budget Spending
• General Fund Condition
• Key Features
• LAO Assessment of the Governor’s Budget
• Budget Would Have Smaller Reserve Than Administration Projects
• Structural Shortfalls Would Return After 2008–09
• Failure to Set Priorities
• Revenue Solutions Are Minimal
• Missed Opportunity on Proposition 98
• LAO’s Alternative Budget Approach
• A Balanced Budget Through 2012–13
• Using the LAO Alternative

Part II: Perspectives on the Economy and Demographics Summary

• Recent U.S. Developments
• Despite Weakening Economy, Most Non–Housing Sectors Have Grown
• Housing–Related Problems Intensified
• Oil Prices Hit New High
• Inflation—Modest But Still a Threat
• Profits Have Softened
• Economic Momentum Weak at Year–End
• The Current Situation in California
• Economy Still Growing Despite Major Problems
• Housing Market—No Immediate Recovery Likely
• Gasoline Prices Hit New Highs
• But Many Sectors Remain Strong
• The Budget’s Economic Outlook
• LAO’s Economic Outlook
• National Outlook
• What Will Happen to Oil Prices?
• Inflation and Interest Rates—Some Decline Expected
• Impact of Federal Economic Stimulus Package
• California Outlook
• Key Forecast Risks
• Comparison to Other Forecasts
• The Demographic Outlook
• State Population to Exceed 38 Million in 2008
• Population Growth Components
• Population Characteristics
• Geographic Population Growth Variation
• Overall Budgetary Implications of the Demographic Forecast

Part III: Perspectives on State Revenues

• Summary
• The Budget’s Forecast for Total State Revenues
• Proposed Revenue–Related Changes
• The Budget’s General Fund Revenue Outlook
• The LAO’s General Fund Revenue Outlook
• We Expect Lower Revenues—Down $1.5 Billion
• Key Factors Underlying Our Lower Estimates
• The LAO’s Forecast for Major Revenue Sources
• Personal Income Tax
• Background
• PIT Revenue Forecast
• Key Forecast Factors
• Sales and Use Tax
• Background
• SUT Rates
• SUT Revenue Forecast
• Key Forecast Factors
• Corporation Tax
• Background
• CT Revenue Forecast
• Key Forecast Factors
• Other Revenues and Transfers
• Deficit–Financing Bonds— $3.3 Billion Included in the Revenue Totals
• Insurance Taxes—Moderate Growth
• Interest Income—Downward LAO Adjustment
• Tribal Gambling Proceeds—Also Overstated
• State Lands Royalties—Upward LAO Adjustment
• The Budget’s Forecast for Special Funds Revenues
• Modest Underlying Growth Expected

Part IV: Perspectives on State Expenditures

• Proposed Total Spending in 2007–08 and 2008–09
• Allocation of Total State Spending
• General Fund Spending
• Special Funds Spending
• Spending From Federal Funds and Bonds
• Federal Funds
• Infrastructure Bonds
• Budgetary Borrowing
• State Appropriations Limit
• COLAs in the Budget
• A Historical Perspective on Spending

Part V: Alternative Budget Overview

• Summary
• Introduction
   
• Overview of LAO’s Alternative Budget Approach
• General Fund Condition
• Targeted Program Reductions and Additional Revenues
• Scoring the LAO Alternative Budget
• A Balanced Budget Through 2012–13
• Key Programmatic Features
• Deficit–Financing Bonds
• Revenue Solutions
• K–14 Education
• Higher Education
• Health
• Social Services
• Criminal Justice
• Parole Realignment
• Resources
• General Government and Transportation
• Conclusion

• LAO Revenue–Raising Proposals
• Summary
• Tax Expenditure Program Proposals
• Reduce the Dependent Credit
• Eliminate the Senior Credit
• Eliminate Partial Exclusion of Capital Gains on Small Business Stock
• Limit Net Operating Loss Deductions
• Limit the Research and Development Credit
• Phase Out Enterprise Zone Programs
• Eliminate Exclusion for “Like–Kind” Out–of–State Property Exchanges
• Eliminate Exemptions for Industry–Specific Equipment
• Eliminate Certain Diesel Fuel Exemptions
• Eliminate Exemption for Leasing of Films and Tapes
• Eliminate Exemption for Custom Computer Programs
• Adopt One–Year Use Tax Standard on Selected Out–of State Purchases
• Proposal to Accrue Estimated Tax Payments
• Does the Proposal Make Sense?
• The Accounting Standards Issue
• The Proposal’s Accrual Amount Is Overstated
• Conclusion
   
• Parole Realignment and the 2008–09 Budget
• Summary
• Introduction
• Part One: Why Realigning Parole Makes Sense
• What Are Parole and Probation?
• Why Parole Makes Sense for Realignment
• LAO Recommendation: Realign Lower–Level Parolees
• Part two: Financing Realignment
• Water and Waste Disposal Enterprise Special District Property Taxes
• Background
• Proposal
• Example: Los Trancos County Water District
• City Proposition 172 Sales Taxes
• Background
• Santa Cruz Precedent
• Proposal
• VLF Revenues Retained by DMV
• Background
• Proposal
• How the Financial Model Would Work
• Part Three: Key Questions Related to Parole Realignment
• What Ongoing Coordination Between State and Local Governments Would Be Required?
• How Should Financial Incentives Be Arranged To Ensure the Best Outcomes?
• How Can the Transition of Responsibilities Be Best Managed to Mitigate the Operational Impact to the State and Counties?
• What Steps Could the Legislature Take To Achieve State Savings in 2008–09?
• Would Parole Realignment Impose a State–Reimbursable Mandate?
• Would the Financing Plan Conflict With the Provisions of Proposition 1A?
• Conclusion
   
• Alternatives to the Governor’s Budgetary Reforms
• Summary
• Budgetary Reforms Under Proposition 58
• Components of the Governor’s Reforms
• Problem Definition
• Limit on General Fund Revenues Forces Reserve Build–Up
• Building Up Reserve Balance
• Automatic Mid–Year Budget Reductions
• Implications of the Governor’s Reforms
• Changes Would Help Level Out Revenues and Increase Reserves…
• …But With Potentially Difficult Results
• Does the State Need Three Reserves?
• Across–the–Board Approach Ill–Advised and Contrary to Balance of Powers
• Building on the Positive Aspects of the Proposal
• Strengthening Proposition 58’s Provisions
• Rethinking the State’s Budgetary Formulas
• Conclusion
   
• Expenditure Details of the LAO Alternative Budget