Based on our revenue and expenditure projections, we estimate that the adoption of the Governor’s budget plan would result in a $726 million deficit in 2007-08 (compared to the administration’s January 10th estimate of a $2.1 billion reserve). The difference in these numbers is due principally to our lower estimates of revenue in both the current and budget years, but also due to higher expenditure estimates, primarily related to Proposition 98. Adoption of the plan would also leave the state with large operating shortfalls in future years, unless additional corrective actions are taken. Thus, the Legislature will face major challenges in crafting a budget for the coming year. We believe that the primary focus should be on finding additional budget savings and/or revenues to address the near- and longer-term shortfalls. Should these solutions be insufficient to cover the full magnitude of the budget shortfall, however, the state can also achieve some near-term savings by reducing the amount of supplemental repayments on deficit-financing bonds relative to the $1.6 billion proposed in the budget.