In theory, California's State-Local Program Realignment Act could facilitate an expansion of local community mental health systems and give local governments another chance to improve the lives of seriously mentally ill people. Whether the resources anticipated by proponents of the legislation actually materialize remains to be seen. The legislation links the fate of the mental health budget to the status of the economy more closely than ever before, creating risks as well as benefits.Even with the best planning at the county level, a gloomy state economy will vastly reduce the real opportunities presented by the new legislation and could actually lead to a reduction in mental health services. In some ways, the challenge to provide community-based care is greater now than in the past because a large pool of patients who lack services are already living in the community.The worst-case scenario would be that the growth of the specialty taxes proves less than expected, counties reduce their local mental health appropriation, social service caseload growth forces a transfer of resources from mental health to social services, the cost of institutional care rises, and institutional beds are reduced under the mistaken assumption that resources will be available for these patients in the community through expanded community services.Moreover, progress resulting from local efforts could be quickly undone by the continued erosion of federal programs for the poor. The degree to which mentally ill persons will be able to live decent lives in the community depends on the future direction of federal economic and social policy (10). Even the most wisely crafted community system will ultimately fail if the federal government does not provide a safety net for the poor. It is this silent dependence of mentally ill persons on federal social and economic policy that makes it so difficult to predict the ultimate fate of state and local efforts to improve the treatment system for these patients.In the most optimistic scenario, which assumes an eventual rebound of the economy, the initial expansion of services to patients would be paid for from the new specialty tax, funds freed by internal shifts in the existing community mental health system, and resources that become available as a result of the counties' increased bargaining power with private sub-acute locked facilities. If these funds are targeted properly, it should be possible to stabilize the lives of patients who formerly used the institutional system repeatedly and thereby to decrease the number of institutional beds needed by those patients. If this proves to be the case, the shift in control of institutional resources from the state to the counties could permit a reallocation of some portion of those resources to further expand the community system for the many patients who need it.Evaluation of the effects of the new legislation is important for California and for other states that face similar problems. Future research should assess whether a dedicated tax for mental health services provides a more stable source of revenue than the state general fund. Another issue is whether a predictable mechanism for reallocation of institutional resources facilitates placement of patients in appropriate levels of care while maintaining enough institutional beds for those who need them. Finally, it must be determined whether patients and families benefit from the changes.