THE BUZZ — California Democrats are in a lose-lose situation. State budget analysts are predicting a $68 billion deficit next year, putting legislative leaders and Gov. Gavin Newsom in the unenviable position of having to slash costs and reject most proposals for new funding in 2024. It’s bad for the nonprofits, advocates and special interest groups, but it’s also not great for Democratic lawmakers, who in recent years have enjoyed the kind of surpluses that allow them to dole out money — and grow political capital — in abundance. The hard-won minimum wages for health care workers, for example, could be delayed at Newsom’s insistence, making things awkward for left-leaning politicians. It's not the worst deficit California has ever faced in terms of percentage of overall spending. The stock market has improved since earlier in the year. The U.S. economy has shown remarkable resilience, growing nearly 5 percent in the third quarter, the fastest pace since 2021.
Those are signs that the deficit projections could improve. But the state will almost certainly need to make cuts on a scale few lawmakers serving today have seen — at a time of great turnover in the Legislature. Assembly Speaker Robert Rivas is starting his first full session leading the body and state Sen. Mike McGuire is scheduled to take control of the upper chamber in February. It’s unclear if McGuire plans to name a new budget chair (state Sen. Nancy Skinner, a Berkeley Democrat, has held the gig since late 2020), but the deficit will certainly be a telling first test for new Assembly Budget Chair Jesse Gabriel. On top of it all, you’ve got a Democratic governor who is trying to keep a steady ship at home while growing his national profile. Newsom has been telegraphing fiscal prudence for more than a year, but a $68 billion shortfall would force him to make unpopular decisions and perhaps even scale back some of his signature initiatives. "Our economy is still good, but what we need to do is be incredibly cautious here," Senate President Pro Tem Toni Atkins told Playbook. "We are in a deficit, and therefore, new programs, new spending — in fact, existing spending — we're going to have to slow down over time.” The chopping block: To address the shortfall, lawmakers could tap into the state’s reserves, borrow from special funds, cut spending, or some combination. They also will be forced to consider cuts to education funding — a move that would be widely unpopular, with the potential to dredge up labor tensions and force painful decisions at the local level during an election year. Gabriel told POLITICO in an interview this week that he hoped to avoid “deep cuts to services for the most vulnerable” as well as to classroom funding. But the LAO expects the funding guarantee for public schools to dip, which would make public education vulnerable to reductions. On the horizon: Newsom is scheduled to deliver a preliminary budget proposal in early January, giving us the first glimpse of how the state could fix its massive problem. But this year is just the beginning — the LAO predicts ongoing $30 billion annual deficits, even if lawmakers are able to wipe out this year’s $68 billion shortfall. We expect Newsom and lawmakers will be closely watching the stock market and praying it keeps going up. — with help from Blake Jones GOOD MORNING. Happy Friday. And a Happy Hanukkah to our Playbook readers!
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