The 2025-26 Budget: Overview of the Governor's Budget

2025-26 BUDGET The 2025-26 Budget: Overview of the Governor’s Budget GABRIEL PETEK | LEGISLATIVE ANALYST JANUARY 2025 1 2025-26 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET Executive Summary Budget Remains Roughly Balanced. In November, we found that the underlying condition of the state’s budget was roughly balanced. This remains true under the Governor’s budget. There are a handful of differences in our estimates, but these changes are small enough on net that they do not substantively change our assessment of the budget condition. Specifically, the administration has higher revenue estimates than our office, but these are mostly offset by their higher spending estimates. We are not describing the budget condition as having a surplus or a deficit at this time. Unique budgetary conditions occurring this year—including atypical legislative action taken last year to both address the deficit and withdraw more in reserves this year—make interpretation of the budget position more complex. (On a technical basis, under the administration’s estimates, we estimate the balance of the Special Fund for Economic Uncertainties would be about $3 billion before the Governor’s proposals.) That said, both our office and the administration anticipate the budget faces deficits in future years. Governor’s Budget Includes Some Smaller Proposals. The Governor’s budget includes three categories of discretionary proposals. First, some proposals provide short-term budget savings that create more budget capacity. These total $2.2 billion. Second, the Governor’s budget includes new discretionary proposals that use budget capacity by increasing spending or reducing revenues. These total roughly $700 million. Finally, the Governor sets the balance of the Special Fund for Economic Uncertainties to $4.5 billion—somewhat higher than the level enacted by recent budgets. Revenue Estimates Reasonable, but Risks Must Be Kept in Focus. The Governor’s budget revenue upgrade, while somewhat higher than ours, is reasonable in light of the recent collection trends. That being said, we continue to be concerned that recent gains are on shaky ground. These gains are not tied to improvements in the state’s broader economy, which has been lackluster, with elevated unemployment, a stagnant job market outside of government and healthcare, and sluggish consumer spending. Instead, the gains appear largely tied to the booming stock market, a situation which can change rapidly and without warning. The administration appears to share some of these concerns, noting recent job losses among high-wage workers and the risks posed by the inherent volatility of tax receipts tied to stock market gains. We suggest the Legislature take heed of these risks and avoid putting too much stock in the recent revenue rebound until it is accompanied by clear improvements in California’s broader economy. Governor’s Use of Reserves Remains Reasonable. The Governor’s budget maintains an already planned withdrawal from the state’s rainy day fund, which we think is a reasonable choice. Since 2023-24, the Legislature has addressed a cumulative total of $82 billion in budget problems, but even including the withdrawal for 2025-26, has only used about half of the Budget Stabilization Account (BSA). Using some reserves this year is therefore warranted and gives the Legislature capacity to focus on addressing the budget’s out-year condition. Maintain Momentum on Solving Budget Deficits. We recommend the Legislature maintain last year’s momentum by developing a plan for addressing the budget problems on the horizon. The underlying budget dynamics today are particularly challenging for three reasons. First, revenues have not caught up with expenditures. Second, under our estimates, expenditure 3 2025-26 BUDGET growth exceeds estimated revenue growth. Third, the budget is currently balanced, but only because the Legislature took significant actions last year—nearly all of which involved one-time uses of funds, like reserve withdrawals, temporary revenue augmentations, and reductions in temporary spending. This means that, going forward, decisions to balance the budget will involve more difficult trade-offs. We recommend the Legislature use the next few months to review program performance to develop its own approach to addressing the deficits. Governor’s Interest in Enhancing Reserve Policies Merited. The Governor has signaled interest in changing the state’s reserve policy by: (1) increasing the cap on BSA required deposits from 10 percent of General Fund taxes to 20 percent of General Fund taxes, and (2) excluding the state’s reserve deposits from the state appropriations limit. We agree that rethinking the state’s reserve policies is merited, particularly in light of increasing volatility in state revenues. The two changes proposed by the Governor are reasonable first steps, but additional changes are warranted. For context, if policies like these had been in place over the last decade, the state would have been required to save only a few billion more in reserves. As such, if the Legislature wishes to have substantively more reserves available when responding to downturns or other emergencies, we would recommend also changing the formulas that set aside funds each year to increase how much is saved. 4 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET INTRODUCTION On January 10, 2025, Governor Newsom’s based on our initial review as of January 12. In the administration presented its proposed state budget coming weeks, we will analyze the plan in more to the California Legislature. In this report, we detail and release many additional issue-specific provide a brief summary of the Governor’s budget budget analyses. BUDGET ROUGHLY BALANCED In November, we found that the underlying Budget Position Largely Similar to Our condition of the state’s budget was roughly Estimate. Before accounting for discretionary balanced. This remains true under the Governor’s choices, the budget position under the budget. In other words, we are not describing the administration’s estimates is similar to what it was budget condition as having a surplus or a deficit under our November estimates. That is, both of our at this time. These concepts are inherently tools of offices have assessed that the budget is roughly communication, not accounting, and are ultimately balanced. There are a handful of differences somewhat subjective. Moreover, specific budgetary in our estimates, but these changes are small conditions occurring this year—including legislative enough on net that they do not substantively action taken last year to withdraw more in reserves change our assessment of the budget condition. this year—make interpretation of the budget (On a technical basis, under the administration’s position more complex. estimates, we estimate the balance of the Legislative Action in June 2024 Addressed Special Fund for Economic Uncertainties [SFEU] Anticipated Budget Problem Proactively. would be about $3 billion before the Governor’s In June of 2024, the Legislature not only addressed proposals.) The main differences between our the budget problem for 2024-25, but also made estimates include: proactive decisions to address the anticipated • Revenue Estimates Higher by $9 Billion. budget problem for 2025-26. This is one of the key Over the budget window—2023-24 through reasons that the budget remains balanced now. 2025-26—the administration’s estimates of The June 2024 budget package committed to a revenues (excluding policy proposals) are total of $28 billion in budget solutions for 2025-26, higher than our November 2024 estimate which included, $12 billion in spending-related by $9 billion. Higher estimates for personal solutions and nearly $16 billion in all other solutions, income taxes and corporation taxes each including $5.5 billion in temporary revenue account for a bit under half of this difference, increases and a $7 billion withdrawal from the with the small remainder attributable to a state’s rainy day fund, the Budget Stabilization variety of other revenues. This improves the Account (BSA). The Governor’s budget does not budget’s bottom line. propose any significant policy changes to the • School and Community College Spending already-adopted budget solutions, but some of the Higher by $5 Billion. Reflecting these higher assumed savings are now lower—totaling $23 billion revenue estimates, the administration’s for 2025-26. Two key areas where these savings estimates of constitutionally required have eroded are in the managed care organization General Fund spending on K-14 education (MCO) tax package and reductions to state is $4.7 billion higher than our November operations. These are described in the box on the estimates. This partially offsets the revenue next page. The forthcoming Appendix 1 will also increase described above, deteriorating the provide a full list of the solutions from the 2024-25 budget’s bottom line. budget package that generate savings in 2025-26. www.lao.ca.gov 5 2025-26 BUDGET Significant Changes to Solutions From June 2024 Budget Package Managed Care Organization (MCO) Tax Package. Some of the largest budget solutions in the June budget package involved the MCO tax, a tax on health plans that supports the Medi-Cal program. Last year’s budget notably increased the size of the MCO tax, generating more revenue for Medi-Cal. In addition, it used more tax funds to offset General Fund spending on Medi-Cal, in turn reducing planned spending on provider rate increases. These solutions yielded General Fund savings of $11 billion through 2025-26. The Governor’s budget reduces this amount by $1.3 billion through 2025-26. The reason for the reduction is the recent voter approval of Proposition 35 (2024), which requires the state to spend less MCO tax money on offsetting General Fund spending and more money on provider rate increases. State Operations Reductions. The 2024-25 budget package assumed that the Department of Finance would reduce state operations expenditures through two unallocated reductions across most state departments. These included (1) a $1.5 billion ($760 million General Fund) reduction through the permanent and ongoing reduction of 10,000 vacant positions and the associated funding and (2) a reduction to General Fund operating expenditures of $2.2 billion in 2024-25 and $2.8 billion in 2025-26 and ongoing. In total, the 2024-25 budget package assumed that state operations costs would be reduced by $3.7 billion ($3 billion General Fund) through these unallocated reductions. The Governor’s budget assumes that the administration achieves significantly lower General Fund savings through these unallocated reductions. Specifically, the Governor’s budget assumes (1) a $620 million ($230 million General Fund) reduction through the permanent elimination of 6,500 vacant positions and associated funding and (2) a $1.5 billion ($820 million General Fund) in 2024-25 and $2 billion ($1.2 billion General Fund) in 2025-26 and ongoing reduction to state operations expenditures. In total, the Governor’s budget assumes that state operations costs are reduced by $2.1 billion ($1 billion General Fund) in 2024-25 and $2.6 billion ($1.4 billion General Fund) in 2025-26 and ongoing. Essentially, the Governor’s budget assumes that the administration is able to achieve about one-half of the General Fund state operations savings assumed in the 2024-25 budget plan. • All Other Spending Lower by $600 Million. are lower. For example, constitutionally Across the rest of the budget, the required debt payments are $1.1 billion lower administration’s estimates of baseline under the administration’s estimates and spending (for example, for caseload growth, the administration scores a higher entering federal reimbursements, and statutory cost fund balance—largely due to over $1 billion increases) are lower than ours by $600 million. in additional revenue accruals—in 2023-24. This is a relatively small number on a net On a net basis, these items slightly improve basis, but is the result of many, much larger, the budget’s bottom line. offsetting differences. For example, the Neither our November estimates nor the administration’s estimate of baseline costs in administration’s estimates included any costs Medi-Cal, the state’s Medicaid program, is associated with the devastating wildfires in higher than our November 2024 estimate by Southern California, as both were developed before $3.1 billion in 2025-26. This is largely due to those wildfires began. While we anticipate some increased pharmacy costs, higher caseload, state costs as well as state policy responses to this and a lower General Fund offset from the disaster, we do not yet have sufficient information MCO tax package. These higher costs are about the extent of those costs. more than offset by a range of other areas where the administration’s cost estimates 6 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET DISCRETIONARY PROPOSALS The Governor’s budget includes three categories The Governor proposes to reduce and revert nine of discretionary proposals, which are those that of these prior appropriations totaling $273 million, are not already committed to under current law or achieving General Fund savings. These include policy. First, some proposals provide short-term funds for water recycling, wildfire prevention budget savings that create more budget capacity. activities at state parks, and dam safety activities. These proposals generate a total of $2.2 billion The proposal would then provide a like amount General Fund savings within the budget window. of funding from Proposition 4, the climate bond Second, the Governor’s budget includes new approved by voters in November 2024. This would discretionary proposals that use budget capacity by result in maintaining prior funding levels for these increasing spending or reducing revenues. These activities but would preclude this amount of total roughly $700 million. Finally, the Governor sets Proposition 4 funds from supporting expanded the balance of the SFEU to $4.5 billion. We describe service levels or additional projects. the major components of each of these categories Spending and Tax below. The forthcoming Appendix 2 and 3 will also provide a complete list of the savings, spending, and Expenditure Proposals tax expenditure proposals. New Spending Proposals of Nearly $600 Million. The Governor’s budget includes Savings Proposals $570 million in new discretionary General Fund Generates $1.6 Billion School and Community spending in 2025-26. After 2025-26, these College Settle-Up Obligation in 2024-25. proposals would add about $300 million in The Governor’s budget proposes providing ongoing spending. Some of the largest spending $1.6 billion less in total funding for schools augmentations proposed include: (1) $60 million to and community colleges than the estimated provide additional grants under the Cal Competes constitutional minimum funding level for 2024-25. program; (2) the intent to partially restore an ongoing This provides one-time General Fund savings in that reduction to the trial courts, which, if enacted, would year, but also creates a “settle-up” obligation, which cost $42 million ongoing; and (3) the Governor’s will need to be paid in a future year if revenues for proposed expansion to College Corps, which 2024-25 were to remain unchanged. If revenues would cost $5 million in 2025-26, but grow to for 2024-25 come in below current projections, $84 million ongoing. this obligation would also decline—potentially to New Tax Expenditures of $150 Million. zero. We understand that while the administration The Governor’s budget includes some revenue indicates it will provide this payment in the future— proposals, which would expand existing tax after the final calculation of the minimum funding expenditures and create new ones. This includes requirement—it also has not scored this future increasing the existing film tax credit from obligation in its multiyear budget. $330 million to $750 million per year and excluding Increases Revenue by Around $300 Million. some military retirement income from taxation. The Governor’s budget proposes to change the Taken together, the administration estimates these rules about how taxable profits are determined for proposals would reduce revenues by around financial institutions. The administration estimates $150 million in 2025-26, reaching $300 million this change would increase revenues on an ongoing by 2028-29. basis by around $300 million per year. Discretionary Reserves Shifts Nearly $300 Million in General Fund Spending to Proposition 4 (2024) Climate Bond. Sets Discretionary Reserve Balance to Recent budget packages included significant $4.5 Billion. The SFEU is a general-purpose General Fund appropriations for a variety of reserve commonly used to provide capacity climate- and environmental-related activities. for unanticipated expenditures, including state 7 2025-26 BUDGET costs associated with disasters and other the balance of the SFEU must be set above zero emergencies. Technically, it is also the end balance for the upcoming fiscal year. Any level above zero of the state’s General Fund—the money that remains is up to the discretion of the Legislature. Recent after accounting for all of the state’s expected budgets have set the SFEU between $3.5 billion revenues and spending. The state constitution and $4 billion. The Governor proposes a $4.5 billion has a balanced budget requirement, which means SFEU balance for the end of 2025-26. BUDGET CONDITION In this section, we describe the overall condition constitutional reserve, the BSA. These balances of the General Fund budget after accounting would be available to mitigate a future budget for the Governor’s budget proposals. We also problem. (As noted earlier, the Governor’s budget describe the condition of the school and community maintains a roughly $7 billion withdrawal from college budget. the BSA planned as part of last year’s budget. Although the state does not currently have a deficit, General Fund Condition this withdrawal would still be allowable under the Figure 1 shows the General Fund condition constitution’s budget emergency rules.) based on the Governor’s proposals and using the Multiyear Budget Condition. The Governor’s administration’s estimates and assumptions. budget includes estimates of multiyear revenues Under Governor’s Budget, Reserves Would and spending. Under the administration’s Total $15 Billion by End of 2025-26. Under the projections, the state faces operating deficits of Governor’s budget, general purpose reserves $13 billion in 2026-27, $19 billion in 2027-28, and would total $15.4 billion by the end of 2025-26. $15 billion in 2028-29. As shown in Figure 2, these (In addition, the state would have $1.5 billion deficits are somewhat smaller than our November in the Proposition 98 Reserve, available only 2024 projections of the budget’s position. Although for school and community college programs.) our estimates were based on current law and As discussed earlier, this includes a balance in policy, not the Governor’s budget proposals, the SFEU of $4.5 billion (somewhat above recently the administration does not propose significant enacted levels), and $11 billion in the state’s main spending reductions or revenue increases in future years, so these figures are mostly comparable. Figure 1 The differences in our estimates General Fund Condition Summary are largely attributable to three (In Millions) factors. First, the administration assumes the state continues to 2023-24 2024-25 2025-26 suspend deposits into the BSA Revised Revised Proposed throughout the multiyear, while we Prior-year fund balance $50,203 $35,877 $26,299 assumed the state would make Revenues and transfers 193,269 222,473 225,095 deposits of around $3 billion to Expenditures 207,595 232,051 228,892 $4 billion each year. Second, Ending Fund Balance $35,877 $26,299 $22,501 Encumbrances 18,001 18,001 18,001 the administration’s estimates of SFEU balance $17,876 $8,298 $4,500 revenues are somewhat higher Reserves than ours in 2026-27 and 2027-28. BSA $22,902 $18,045 $10,945 Third, the administration’s SFEU 17,876 8,298 4,500 estimate of spending is notably Safety net 900 — — lower than ours in 2028-29. Total Reserves $41,678 $26,343 $15,445 8 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET the Governor’s budget, the state Figure 2 would make mandatory deposits Multiyear Deficits Persist of $1.2 billion in 2024-25 and $376 million in 2025-26. These LAO and DOF Estimates of Multiyear Budget Condition (In Billions) deposits would bring the balance in the reserve to $1.5 billion. (The 2026-27 2027-28 2028-29 state previously withdrew the entire -$5 balance to address shortfalls in 2023-24.) The mandatory deposit -10 in 2024-25 replaces a $1.1 billion -15 discretionary deposit included in -20 the June 2024 budget. Funds Some Ongoing -25 Increases. The Governor’s budget -30 Operating Deficits Under LAO November Outlook provides approximately $2.5 billion Operating Deficits Under DOF Estimates in Governor's Budget -35 to fund a 2.43 percent statutory cost-of-living adjustment for DOF = Department of Finance. existing school and community college programs. Consistent We do not have detail on the source of this final with previous legislation, the budget sets aside difference, but it seems to be driven in part by $1.1 billion to complete the expansion of transitional lower spending estimates in health and human kindergarten in 2025-26. The budget also provides services, higher education, and on required $746 million to reduce student-to-adult ratios debt payments under Proposition 2. That said, in in transitional kindergarten classrooms from the scope of the budget’s uncertainty for these 12:1 to 10:1. The budget provides a $435 million years, the differences between our estimates increase for the Expand Learning Opportunities and the administration’s estimates are not Program. This augmentation is primarily to particularly significant. increase the number of school districts that School and Community College Budget must offer enrichment programs (such as after school activities and summer school) to all of their Funding for Schools and Community Colleges students. The budget also includes $30 million to Up $7.1 Billion Across the Budget Window. support 0.5 percent systemwide community college Compared with the estimates from June 2024, the enrollment growth. administration estimates the constitutional minimum funding level for schools and community colleges Allocates One-Time Funds for Discretionary is up $7.1 billion. Of this increase, $3.9 billion Grants, Staffing Enhancements, and is attributable to 2024-25 and $3.2 billion is Technology Activities. The largest one-time attributable to 2025-26. (Spending is unchanged proposal is to provide $1.8 billion for schools in 2023-24.) The increase is due almost entirely through a new discretionary block grant that could to higher General Fund revenue estimates. Local be used to fund new activities or cover costs property tax estimates, by contrast, are similar to of existing programs. The budget also includes the estimates from June. In addition, approximately $500 million to fund literacy and mathematics $4 billion in one-time spending expires in 2025-26, coaches at high-poverty schools. This proposal freeing-up the underlying funding for other school would expand upon a program the state funded and community college purposes. in previous budgets. In addition, the Governor proposes a series of initiatives intended to advance Makes Required Reserve Deposits Into teacher training and recruitment efforts at schools Proposition 98 Reserve. The Proposition 98 and implement a common technology platform Reserve is a statewide reserve account for across the community college system. school and community college funding. Under 9 2025-26 BUDGET Delays $1.6 Billion Payment in 2024-25 its revenue estimates. More specifically, if state Pending Revised Revenue Data. As described revenues come in below the levels estimated in earlier, under the Governor’s budget, total funding the budget, the constitutional funding requirement for schools and community colleges in 2024-25 also would decrease. Under this scenario, the state would be $1.6 billion less than the administration’s could reduce or eliminate the $1.6 billion payment estimate of the constitutional minimum funding more easily than if it had already appropriated level that year. The administration indicates it will that amount for schools and community colleges. provide this payment in the future after finalizing (The delay only affects 2024-25. For 2025-26, the the calculation of the minimum requirement. total funding proposed in the budget equals the According to the administration, this delay is estimate of the constitutional minimum level.) intended to mitigate some of the downside risk to COMMENTS Revenue Estimates Reasonable, but Risks State Faces Some Additional Cost Pressures. Must Be Kept in Focus. Our November Fiscal The budget faces some cost pressures that are Outlook included an upgrade to the state’s revenue not included in the administration’s estimates. outlook in recognition of positive trends in tax First, the wildfires in the Los Angeles region have collection in recent months. Since then, this trend brought devastation, and these events create some has continued with strong end-of-year income budgetary uncertainty for the state. The extent of tax withholding and corporation tax payments. the state costs from these fires will depend on the The Governor’s budget revenue upgrade, while continually evolving situation, as well as decisions somewhat higher than ours, is reasonable in by the Legislature and federal government, light of these recent collection trends. That being including those related to cost sharing for response, said, we continue to be concerned that recent clean up, recovery, and other possible assistance. gains are on shaky ground. These gains are Second, as described earlier, the Governor’s not tied to improvements in the state’s broader budget generates a settle-up obligation to schools economy, which has been lackluster, with elevated and community colleges, which is not accounted unemployment, a stagnant job market outside for in the administration’s multiyear planning of government and healthcare, and sluggish estimates. If revenues for 2024-25 remain at the consumer spending. Instead, the gains appear level currently forecasted—or come in higher—the largely tied to the booming stock market, a situation state would owe $1.6 billion in additional payments which can change rapidly and without warning. to schools. If revenues are lower, this payment The administration appears to share some of would be lower, but the overall condition of the these concerns, noting recent job losses among budget would also be worse. high-wage workers and the risks posed by the Governor’s Use of Reserves Remains inherent volatility of tax receipts tied to stock Reasonable. Last year’s budget package market gains. Further complicating this muddied planned for a $7 billion withdrawal from the BSA picture is the tax deadline delay in response to the in 2025-26. The Governor’s budget maintains this Los Angeles fires, which will make it difficult to read withdrawal. We think this is a reasonable choice. tax collection trends over the next several months. Since 2023-24, the Legislature has addressed a We suggest the Legislature take heed of these risks cumulative total of $82 billion in budget problems, and avoid putting too much stock in the recent but even including the withdrawal for 2025-26, revenue rebound until it is accompanied by clear has only used about half of the BSA. Using some improvements in California’s broader economy. reserves this year is therefore warranted and gives the Legislature capacity to focus on addressing 10 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET the budget’s out-year condition. The Governor’s years—and understanding the efficacy of those proposal would also leave another $11 billion expansions is critical—the Legislature also could remaining in the BSA, which would help the examine whether longer-standing programs still are Legislature address budget problems that are likely achieving desired outcomes. The administration to occur in the future. As such, we recommend the has signaled an interest in starting to address the Legislature maintain the Governor’s approach on structural deficits, which is warranted. However, the use of reserves in its own budget plan. the administration indicated they would not begin Maintain Momentum on Solving Budget address the multiyear budget condition until the Deficits. We recommend the Legislature maintain May Revision. We advise starting this work now. last year’s momentum by developing a plan for Waiting until May to conduct this oversight would addressing the budget problems on the horizon. be too late for the Legislature to exercise its While out-year budget problems of this magnitude priorities effectively in the final budget. As such, have been seen before, the underlying budget we recommend the Legislature use the next few dynamics today are particularly challenging months to review program performance to develop for three reasons. First, despite recent gains, its own approach to addressing the deficits. revenues have not caught up with expenditures, Governor’s Interest in Enhancing Reserve and questions remain about the sustainability of Policies Merited. The Governor has signaled those continued improvements. Second, under interest in changing the state’s reserve policy our November estimates, outyear expenditure by: (1) increasing the cap on BSA required growth exceeds historically average revenue deposits from 10 percent of General Fund growth. Ultimately, state revenues are unlikely to taxes to 20 percent of General Fund taxes, and grow sufficiently to balance the budget. Third, the (2) excluding the state’s reserve deposits from the budget is currently balanced, but only because state appropriations limit. We agree that rethinking the Legislature took significant actions last year— the state’s reserve policies is merited, particularly nearly all of which involved one-time uses of funds, in light of increasing volatility in state revenues. like reserve withdrawals, temporary revenue The two changes proposed by the Governor are augmentations, and reductions in temporary reasonable first steps, but additional changes spending. This means that, going forward, are warranted. For context, if policies like these decisions to balance the budget will involve more had been in place over the last decade, the state difficult trade-offs. would have been required to save only a few billion Oversight Provides Information Needed to more in reserves. Meanwhile, since 2023-24, the Make Difficult Choices. Absent above average Legislature has addressed $82 billion in budget revenue growth, the Legislature will have to problems. As such, if the Legislature wishes to increase revenues or reduce spending to balance have substantively more reserves available when the budget in the coming years. Understanding responding to downturns or other emergencies, we which programs are working well and those ones would recommend also changing the formulas that in need of adjustment is a key starting place for set aside funds each year to increase how much considering these future budget solutions. While is saved. some programs have grown considerably in recent 11 2025-26 BUDGET LAO PUBLICATIONS This report was prepared by Ann Hollingshead, with contributions from analysts across the office and reviewed by Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 12 LEGISLATIVE ANALYST’S OFFICE