California�s Economic and Budget Outlook

California’s Economic and Budget Outlook Legislative Analyst’s Office www.lao.ca.gov LAO California Employment Expanding Year-Over-Year Percent Change in California Employment, By Quarter 4% 3 2 1 Household Survey Payroll Survey 0 -1 -2 -3 2001 2002 2003 2004 2005 LAO Leading Sector—Construction Percent Change in Jobs by Industry Sector, December 2004 Through December 2005 Construction Services Total Information Government Natural Resources and Mining Financial Activities Trade, Transportation, and Utilities Manufacturing 2.0 4.0 6.0 8.0 10.0% LAO Outlook—Continued Growth  Housing to Downshift  Consumer Spending To Hold Its Own  Business Hiring and Spending To Continue LAO Risks To Economic Outlook  Energy Costs • More price increases may spark inflation  California Real Estate • Market is cooling off • “Orderly” decline projected in sector that is prone to booms and busts LAO General Fund Revenue Strengthening Total General Fund Revenues (In Billions) $95 90 85 2006-07 Budget LAO November 2005 2005 Budget Act 80 75 70 65 60 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 LAO Income Tax Estimated Payments Soaring Annual Percent Change 40% Personal Income Tax Corporation Tax 30 20 10 0 -10 -20 -30 98 99 00 01 02 03 04 05 LAO Budget Plan  Fails to Get State’s Fiscal House in Order  Despite Booming Revenues, Leaves State With: • Large structural shortfalls • Enormous outstanding obligations LAO Operating Shortfalls Persist Despite Booming Revenues General Fund (In Billions) $1 0 -1 -2 -3 -4 -5 -6 2004-05 2005-06 2006-07 2007-08 2008-09 LAO Budgetary Borrowing Outstanding After 2006-07 Schools Local Governments Private Markets Special Funds Total: $20 Billion LAO Amnesty-Related Income Tax Effects Budgetary Basis (In Billions) $5 4 3 2 1 0 -1 2005-06 Budget Act LAO Feburary 2006 -2 03-04 and Prior 04-05 05-06 06-07 07-08 08-09 09-10 10-11 LAO Risks and Pressures  EconomyHigher Energy Costs/ Steeper Real Estate Decline  LawsuitsPotential Exposure of Nearly $1.5 Billion  Federal Deficit Reduction Act Hundreds of Millions of Dollars Annually  Unfunded LiabilitiesMultibillion Dollar Exposure Over Time LAO LAO Advice  Slow Spending Increases  Use Resources to Increase Reserves or Prepay Debt LAO