With the deadline approaching, Gov. Gavin Newsom and Democrats in the state Legislature are working to resolve their differences over access to public health services, delaying a minimum wage hike for workers and holding back tax credits for businesses so they can dig out of California’s $45 billion budget deficit.
Governor’s Proposal $12.2 billion has been cut from the state’s rainy-day reserves to cover shortfalls over the next two years, and funding to tackle climate change, provide broadband internet, and expand subsidized child care has been slashed, among dozens of other cuts.
Lawmakers responded last week with their own plan, which largely matches the governor’s strategy but pushes back on some of his proposals to reduce funding for homelessness and housing. Democrats in the Legislature also called for deeper cuts to climate change programs and the state’s prison system.
Assembly Budget Chairman Jesse Gabriel (D-Encino) said the Legislature’s budget proposal restores the most painful cuts proposed by the governor “to safety net programs, housing and health, including rate increases for health providers.” Lawmakers have targeted some of Newsom’s key programs, such as reductions in grants to reduce homeless encampments and funding to support behavioral health.
“These were tough choices,” Gabriel said at an Assembly budget hearing last week. “But we had to set priorities and come up with a plan of action because that’s what’s needed right now.”
California is running a deficit mainly because tax revenues have come in lower than expected, which Newsom has described as a return to normalcy after the COVID-19 pandemic and an economic boom fueled by billions of dollars in federal stimulus payments and business loans. Higher spending due to poor revenue forecasts has also exacerbated the state’s financial troubles.
Legislative leaders and members of the governor’s staff negotiated privately last week to reach an agreement before the June 15 deadline for the Legislature to pass the state budget.
If lawmakers and the governor are unable to reach a budget agreement in the coming days, the Senate and Assembly are expected to pass a preliminary budget next week. Lawmakers would then adopt additional bills reflecting the agreement with the governor before the budget takes effect on July 1.
These are some of the key differences that are expected to be resolved in the final budget agreement:
Increase in Medi-Cal reimbursement rates
Newsom and lawmakers renewed the tax on managed care organizations last JuneThis is known as the MCO tax. This tax applies to health insurance providers that charge a fixed monthly payment for services and is based on the number of people enrolled in the plans each month.
The tax essentially serves as a mechanism to allow California to collect billions of dollars in additional federal funding for Medi-Cal, California’s healthcare system for low-income residents, as Democrats are expanding eligibility to all income-qualified immigrants.
Legislation approved by Democrats last year extends the MCO tax through 2027 and dedicates a portion of the revenue to raising payment rates to doctors and other Medi-Cal providers, in some cases for the first time in two decades.
But Newsom’s budget proposal reroutes this funding, taking $6.7 billion over several years that was intended to be spent on higher provider rates and using that money for general Medi-Cal costs. By changing the tax, Newsom’s changes could raise a total of $9.7 billion to support the Medi-Cal program with federal approval.
The governor’s proposal disappoints doctors and other health care providers who have argued for years that the state’s reimbursement rates for serving Medi-Cal patients are too low to sustain practice. They say low reimbursement rates lead to a shortage of providers in the state system and deprive California’s most vulnerable populations of access to care. Doctors are rallying to get the proposal passed A measure on the 2024 ballot This would permanently establish the MCO tax and use a portion of the revenue to increase provider reimbursement rates.
The budget plan put forward by Legislative Democrats rejects Newsom’s plan to eliminate more than $2.4 billion in provider rate increases that would have gone into effect on Jan. 1, 2025. Lawmakers instead postpone most rate hikes until 2026.
The California Medical Association, which is part of a coalition opposing both proposals, said the governor and lawmakers have “a once-in-a-generation opportunity to achieve true equity in health care.”
“Too many families are not getting the care they need because we have refused to properly fund Medi-Cal,” said Dustin Corcoran, CMA’s chief executive officer. “The state has added millions of new patients to Medi-Cal and this funding will ensure we have the providers to care for them.”
Raise the minimum wage for health workers — or not
Newsom signed legislation in October that raised the minimum wage for health care workers to $25 an hour. Labor unions celebrated the hard-won pay hike that will mainly benefit workers not directly involved in providing health care.
At the time, no one, including the governor, publicly mentioned a key caveat he had laid out behind closed doors before signing the bill: If the state’s revenue situation turned out to be as bad as forecasts, “under no circumstances” would he allow the law to go into effect in June as planned.
Just weeks after signing the law, Newsom began demanding reforms to reduce funding for pay raises as the budget deficit grew. Months of private negotiations between the administration, labor unions and the health care industry resulted in no solution.
The governor has outspokenly expressed his concerns about the plan’s price tag, which was originally pegged at $2 billion from the state’s general fund, with $2 billion paid for in its first year from federal funds. Other estimates suggest the administration is overestimating the cost, which could be closer to $300 million.
Newsom provided no funding for the pay raise in his May budget proposal as negotiations with the Department of Labor continue. Democratic lawmakers, siding with unions, want to spend $100 million for the pay raise in 2024-25, rising to $300 million in the third year of implementation.
How much damage does it have to do to the business?
In the early stages of the pandemic, Newsom and lawmakers barred the ability of businesses with more than $1 million in revenue to deduct net operating losses from their tax bills, and limited the state’s business tax credits to $5 million per filer in 2020, 2021 and 2022.
These changes were adopted to temporarily boost state tax revenues during a chaotic time when the pandemic has created economic uncertainty across the country and massive revenue losses are anticipated in California.
Newsom reinstated the deductions and eliminated the tax cap a year early in 2022, when the state expects a huge budget surplus. Now that California faces a deficit, he wants to suspend and limit the tax breaks again for the 2025, 2026 and 2027 tax years, with the ability to reinstate the credits when revenues improve.
Lawmakers agreed with the governor’s plan, but demanded the changes be implemented a year earlier. Putting the tax credit adjustments into effect in 2024 allows the Legislature to make smaller cuts to other programs in its budget plan, saving more than $3 billion by 2026.
Loren Kay, president of a think tank affiliated with the California Chamber of Commerce, said, California Foundation for Commerce and Educationsaid companies factor the credit into their future business plans, and suddenly losing those savings could force them to cut back on the number of employees or inventory to meet the cost of the unexpected tax bill.
“In this case, the Legislature has made it a little bit worse, because at least with the governor’s proposal you have that information up front, because it starts in the 2025 tax year,” Kaye said.
The cap is the second time in five years the state has imposed a limit on the tax credit, which could be a disincentive for companies that operate in California because of generous research and development or motion picture credits, Kay said.
“We’re all about innovation,” Kaye said. “It’s one of our great competitive advantages and it’s sad to see that people think we’re not supporting innovation in the way that we have historically done.”
Targeting Newsom’s projects
The Legislature’s proposal highlights major differences between the governor and lawmakers in his own party over funding for some of his key policies, including homelessness and prison reform.
Lawmakers proposed an additional $1 billion in cuts to the Department of Corrections and Rehabilitation, including at least $12 million in cuts to the governor’s project to replace San Quentin. Newsom’s cuts include $80.6 million in savings from the newly announced deactivation of 46 housing units at 13 state prisons.
Democrats in the Legislature also want to spend $1 billion more than the governor on a sixth round of homeless housing, assistance and prevention grants to local governments to combat the homelessness crisis. At the same time, lawmakers proposed cutting $100 million in funding for clearing homeless encampments in the current budget year.
