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Essential Politics: The story behind California’s $26-billion budget windfall

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Gov. Gavin Newsom and members of the California Legislature have some tough questions to answer when they get down to work in a few weeks discussing a new spending plan for state government.

Here’s one of them: How confident can they be in their ability to forecast the economic road ahead when their earlier prediction of a historically deep deficit was apparently off by tens of billions of dollars?

You may have seen the news last week of a projection by the independent Legislative Analyst’s Office of a surprising $26-billion tax windfall in the coming fiscal year. But this turns out to be less a story of some kind of surprise jackpot and more a cautionary tale of how early doomsday predictions were way off.

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No $54-billion deficit, thanks to wealthy Californians

Newsom’s fiscal advisers saw nothing but storm clouds on the horizon in May, believing the scarcely 3-month-old pandemic would cause a collapse in tax revenue, leave millions of Californians scrambling for health and social services and force lawmakers to erase a colossal $54.3-billion deficit over a 14-month period.

But the LAO forecast released last week makes clear that’s not what happened. The idea of a “windfall” of cash sounds like some huge spike in tax revenue, but it’s really an absence of a huge drop in tax revenue.

Dig into the report, and you’ll find the analysts believe the state’s big three revenue sources — income, sales and corporation taxes — will together produce almost $39.2 billion more than assumed by the budget Newsom signed June 29.

The numbers can be confusing, as they cover different parts of the state’s sprawling system of revenues and expenditures and different time frames. And no one should assume that everything turned out fine: Tax revenue did fall relative to pre-pandemic assumptions, and the shortfall has been exacerbated by large, unexpected expenses related to COVID-19.

Still, the very thing that’s often criticized in California — a progressive income tax system that relies heavily on the state’s wealthiest residents — seems to be what cushioned the blow.

“Stable employment among high-income earners and a rebound in investments held by wealthy Californians has led to continued growth in tax payments from these taxpayers,” the analysts wrote.

One point about the process bears mention. The enacted 2020-21 budget was built on a forecast made less than two months into the pandemic, without a clear picture of April income tax receipts, because the state allowed Californians to delay their tax payments until July. Despite expectations by some budget watchers, no changes were made to tax revenue assumptions before legislators adjourned for the year in August.

Cash for schools, lack of federal relief are the new pressures

The new analysis serves as a reminder of all the actions taken to offset the presumed (but unrealized) collapse in tax revenue. Newsom and lawmakers agreed to more than $20 billion in major spending reductions as part of this year’s budget deal.

Most of that amount — $12.5 billion — was skimmed out of public school funding by the use of “deferrals,” essentially telling school officials that the owed money would be paid at a later date and leaving those local districts to either dip into their own cash reserves or borrow the operational funds needed.

The LAO analysis suggests lawmakers should take a close look at the current budget’s K-12 education details and consider reversing those deferrals of funds and possibly canceling scheduled supplemental school payments.

And all of this comes back to what assumptions Newsom and legislative leaders should make about a new round of coronavirus relief funds once President-elect Joe Biden takes office in January. $11 billion of this year’s spending reductions — including cutbacks to higher education, state worker compensation and the courts — would have been rescinded if new federal relief had materialized this fall. Those items could be front and center if the incoming Biden administration is able to strike a deal with Congress that includes state government assistance.

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Biden, Trump and America’s split-screen presidency

My Washington colleague Janet Hook really nails the politics of the presidency at this moment, when a vanquished chief executive sits in self-imposed exile and his replacement makes plans for the task at hand come January.

While President Trump, Hook writes, “puts governing responsibilities on the back burner to mount his all but doomed rearguard action to hold power, Biden is modeling the role of president as he builds his administration-in-waiting.”

Biden will unveil his first Cabinet picks Tuesday as the states that were key to his electoral victory are poised to certify their vote totals.

One of those could be secretary of State, with the president-elect expected to announce that he will nominate Antony Blinken, 58, a veteran diplomat and former senior official at the State Department and National Security Council. Biden’s ability to restore normalcy in government could rely heavily on his ability to revitalize key agencies like the State Department.

He has also added four Obama-Biden administration veterans to his top ranks as he continues to build out his White House team.

Who else might the incoming president choose for his team? The names of at least seven prominent Californians are being frequently mentioned in Washington.

Back on the Trump legal challenges, a federal judge in Pennsylvania said Saturday that he won’t stop officials from certifying election results that show Biden winning the Keystone State by more than 81,000 votes. Also on Saturday, the president’s campaign requested another recount of votes in Georgia — a day after state officials certified results showing Biden won the state — and continued its pursuit of a limited recount in Wisconsin.

Those challenges to the election results are sparking an intense reaction in communities of color across the nation.

“The themes we see that persist here are this: ‘Black people are corrupt. Black people are incompetent, and Black people can’t be trusted,’” said Michigan Atty. Gen. Dana Nessel.

President-elect Joe Biden and President Trump.
(Associated Press)

National lightning round

— Trump and his allies are harking back to his own 2016 transition to make a false argument that Trump’s presidency was denied a fair chance for a clean launch.

— When he exits the Oval Office on Jan. 20, don’t expect the 45th president of the United States to disappear from your Twitter feed.

— How might the broad perception that Biden, at 78, will choose to be a one-term president hobble his effectiveness? Should he perhaps deny it?

— With just over six weeks until Georgia’s pivotal Senate special election Jan. 5, a time when the state’s Republicans most need to be united, they instead are engulfed in bitter infighting.

— And speaking of Georgia: Sen. Kelly Loeffler’s latest coronavirus test came back negative, but her campaign said Sunday she will continue to quarantine at least until she gets another negative result.

— President Trump railed against the Paris climate accord on Sunday, telling world leaders at a virtual summit that the agreement was designed to cripple the U.S. economy, not save the planet.

Treasury Secretary Steven Mnuchin says he will not extend several emergency loan programs set up with the Federal Reserve to support the economy in the midst of the coronavirus crisis.

— California and other states are racing to finalize plans for who will get the first doses of COVID-19 vaccines and how they will be delivered.

— A USC Dornsife post-election poll shows growing damage to voters’ confidence in the integrity of the presidential election.

The staying power of Prop. 13

California voters rejected Proposition 15, the fall statewide ballot measure seeking to loosen the limits on business property taxes to boost funding for schools and local governments. And in doing so, they offered at least a glimpse of how they feel about the iconic ballot measure that would be have been downsized under the plan, Proposition 13.

A new survey by the UC Berkeley Institute of Governmental Studies finds the staying power of Prop. 13 seems strong more than 42 years after its passage. Fifty-three percent of voters said they’d vote for the original property tax limitation if it was on the ballot now — virtually unchanged from polls in 2008 and 1998. A plurality of almost every voter subgroup in the Berkeley poll supported Prop. 13, even those who self-identified as “somewhat liberal.”

One nugget that stood out to me: Prop. 13 has largely been criticized through the years as unfair to future generations of homeowners — those who purchase a house similar to that of a neighbor but pay higher property taxes because that neighbor has stayed put for a couple of decades. The poll found 57% of those who said they’ve owned their home for five years or less support Prop. 13, perhaps hoping they, too, will one day take advantage of its strict limits on property tax increases.

Today’s essential California politics

— Newsom and his family are quarantined at home after three of his children were exposed to a CHP officer who tested positive for COVID-19. Last week, one of Newsom’s children was quarantined after a Sacramento private school classmate tested positive for COVID-19, the governor’s office said Friday.

— The longtime leader of California’s NAACP, Alice Huffman, will step down next month amid conflict-of-interest allegations after her public affairs company earned $1.7 million endorsing ballot measures this year.

— California lawmakers who flew to a conference in Maui amid the pandemic defended the trip, despite officials in their home state advising people not to travel during the current surge in COVID-19 cases.

— A photograph showing one of L.A. Mayor Eric Garcetti’s closest advisors making a sexually provocative gesture, while the mayor stands nearby, raises new questions about Garcetti’s contention that he had no knowledge of inappropriate behavior by former Deputy Chief of Staff Rick Jacobs.

— A California appellate court stayed a lower court ruling that barred Gov. Gavin Newsom from issuing executive orders that create new law, the latest development in a legal challenge to the governor’s response to the COVID-19 pandemic.

— California Republican leaders go all in on Trump’s election subterfuge.

— In a win for the state’s struggling cannabis industry, a Fresno judge has dismissed a lawsuit filed by 24 cities seeking to block cannabis deliveries in communities that have outlawed sales in shops.

— California’s unemployment benefits agency, which has reported a deluge of fraudulent claims, has sent out more than 38 million pieces of mail containing Social Security numbers since the COVID-19 pandemic began.

— A Times investigation has found “crime-free housing” policies have disproportionately affected Black and Latino residents in California, making it harder for them to rent apartments and leaving them at greater risk of eviction.

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