(235 pages, 10.5 MB) Reflecting both the continuing expansion of the California economy as well as the need to provide for less-certain times, the Governor's Budget for 1986-87 provides for expansions in state services and employees to provide those services, and restores the state's "rainy day" fund. While the level of General Fund revenues is 4.1 percent higher than the level estimated for the current year, the level of General Fund expenditures proposed in the budget is only 1.1 percent higher than the level estimated for the current year. This is because (1) a substantial portion of the projected revenue growth must be used simply to fund current expenditures, and (2) the budget proposes to increase the balance in the state's reserve fund. Even without these checks on expenditure growth, however, the state's ability to expend funds at a rate comparable to the growth in revenues would be limited in 1986-87 by the state's constitutional limitation on appropriations. Here, we discuss the state's fiscal condition in 1985 and 1986, explain the state's budgetary prospects beyond the upcoming year, and provide a more detailed examination of revenues and expenditures.