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. | 
