What’s a few billion between friends

Jan 08, 2024

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California Gov. Gavin Newsom talks about the future UCLA Research Park, California's new global hub for innovation, being built at the former Westside Pavilion in Los Angeles on Wednesday, Jan. 3, 2024. (AP Photo/Damian Dovarganes)

THE BOTTOM LINE: The size of California’s budget deficit is the billion-dollar question looming over Sacramento this week. The more specific question: How many billions?

Much depends on the answer, which so far has been a closely guarded secret.

Late last year, the Legislative Analyst’s Office projected that California would face a record $68 billion shortfall in the 2024 budget year. The eye-popping figure, which came after a record nearly $100 billion surplus in 2022, raised the prospect of major cuts to state programs, delays in long-term climate projects and a dip into the $22 billion rainy day fund.

The LAO projection was scary, but Gov. Gavin Newsom and Democrats in the Legislature were quick to downplay the doom-and-gloom. Newsom said the estimate was overblown in an interview with Elex Michaelson of Fox 11 Los Angeles.

It’s “smaller than what has been advertised,” Newsom said.

Newsom is expected to provide an updated figure on Wednesday, along with a plan to close the gap.

The difference between the conflicting projections reflects a reality of state budgeting: Deficit projections are only point-in-time estimates based on variable factors. The LAO looks at past revenue trends to predict future tax income, while the Department of Finance’s forecasting model places greater emphasis on factors such as wages, the stock market, corporate profits and employment.

Those economic indicators are largely trending in the right direction despite public pessimism.

The S&P 500 index, for example, soared 24 percent last year and the tech-heavy Nasdaq was up more than 50 percent. “This bodes well for state income tax revenues and the state’s budget,” Department of Finance spokesperson H.D. Palmer said in a recent email.

The Legislature’s analysts review essentially the same data to predict revenues as the Department of Finance, but their different forecasting models generate different deficit numbers, said Ann Hollingshead, principal fiscal and policy analyst with the LAO.

There are variables in how they predict state spending as well, including estimates for the caseload of social programs or different assumptions about federal reimbursements, Hollingshead said.

It may seem like an academic issue, but the difference between the administration and the LAO has tangible effects on policy making. The assumed size of the shortfall determines possible cuts and funding delays or whether to perhaps claw back money already promised to such things as education and renewable energy.

This week is just a preview. Newsom will outline his final budget proposal in May and the projections will be rooted in an updated economic reality. Then the real fight begins.

IT’S MONDAY AFTERNOON. This is California Playbook PM, a POLITICO newsletter that serves as an afternoon temperature check of California politics and a look at what our policy reporters are watching. Got tips or suggestions? Shoot an email to sgtaylor@politico.com or send a shout on X. DMs are open.

WHAT YOU NEED TO KNOW TODAY

Kevin McCarthy.

Then-Rep. Kevin McCarthy speaks to reporters at the Capitol hours after he was ousted as House speaker last year. | J. Scott Applewhite/AP

EXTRA TIME: Candidates running to finish former House Speaker Kevin McCarthy’s term will have two additional weeks on the campaign trail now that Newsom has announced a special primary election for March 19.

Instead of housing the special election primary on the March 5 ballot during the regular statewide primary, Newsom said today that the primary will be decided two weeks later, at the request of the counties in the district.

The special election means more time for fundraising and campaigning before voters send two candidates to the May 21 special general election.

For more information, read Lara Korte’s story here.

ON THE BEATS

A FAMILY MATTER: A fight over the estate of the late Sen. Dianne Feinstein’s billionaire husband is out of the courts — but not yet settled. A hearing in San Francisco Superior Court scheduled for today was canceled and two lawsuits filed by the senator’s daughter, Katherine Feinstein, were quietly withdrawn last month. The dismissal of the two suits suggest some progress in the weeks since Katherine Feinstein agreed in early December to mediation with the executors of Richard Blum's estate and his children from a previous marriage. The dispute created unflattering headlines for the family of the senator, who died in September. Judge Roger Picquet urged the parties to try to reach a settlement during the private mediation. Picquet will ultimately have to approve any settlement in the case. — Dustin Gardiner

THE END OF THE ROAD: The Supreme Court today decided not to consider an industry challenge to California's ban on flavored tobacco. The court without comment turned down the case brought by manufacturers and retailers.

It’s the end of the legal line for a law that survived multiple rounds of litigation and a ballot fight.

The ban, passed in 2020, made it illegal to sell menthol cigarettes and any other flavored tobacco. Industry opponents argued the products are popular and legal elsewhere in the U.S.

Despite the ban's legal successes, it's been hard to enforce. Retailers say they are confused about what they are allowed to sell as the industry created new products to circumvent the ban. —Rachel Bluth

WHAT WE'RE READING TODAY

MUSK ON DRUGS: Billionaire Elon Musk issued a series of social media responses to a Wall Street Journal report detailing his reported use of drugs including LSD, ecstasy, cocaine and psychedelic mushrooms. The CEO of Tesla and SpaceX said he hasn’t failed drug tests and, essentially, so what: “If drugs actually helped improve my net productivity over time, I would definitely take them!” (The Wall Street Journal)

SCARY SKIES: Alaska Airlines and United Airlines grounded their 737-9 Max planes, canceling nearly 400 flights by Monday afternoon after a panel flew off one such aircraft Friday on a flight bound for Southern California. (Los Angeles Times)

FIRE EPILOGUE: A judge in El Dorado County has determined there isn’t enough evidence to charge a father and son with igniting the devastating 2021 Caldor Fire by shooting firearms in tinder-dry forest. The men still face weapons charges. The fire destroyed 600 homes and burned through the Sierra-at-Tahoe ski resort. (San Francisco Chronicle)

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