What to look for when Newsom unveils budget

Just ahead of his constitutional deadline, this morning Gov. Gavin Newsom will present his initial spending plan for 2024-25, kicking off six months of negotiating, demanding and perhaps a little whining for good measure. 

That’s particularly the case when the governor and state legislators must figure out how to cover a huge budget deficit. Some key questions to keep in mind:

How big a deficit does Newsom project? The nonpartisan Legislative Analyst’s office says the current estimate is about $68 billion, but the governor has hinted his Department of Finance will offer a lower number, which would mean a smaller problem to solve.

How much does Newsom dip into reserves? The state has some $24 billion in savings, so using it could avoid some controversial spending cuts. But California still needs to save for a rainy day in case the economy worsens.

Where are the spending cuts? The governor ordered a spending freeze last month and is expected to look first to cut one-time expenditures and programs that haven’t started yet. He’s already said he wants to take another look at phased-in wage increases for healthcare workers, so don’t be surprised if he proposes a delay.

Are any significant programs cut? For example, Republicans are targeting a new expansion of Medi-Cal coverage for low-income undocumented immigrants. But Newsom said last week that he’s “committed” to the first-in-the-nation plan. 

Which interest groups get hit hardest? It’s campaign season, so how willing is Newsom to take money away from labor unions and other loyal supporters of Democrats?

Where are the potential conflicts with legislators? When the Legislature reconvened last week, Democratic leaders said they want to protect existing services and aid to Californians as much as possible. But will there be enough savings elsewhere to avoid painful cuts to the safety net, education, environmental protection and a host of other priorities?

Are taxes on the table? California’s boom-and-bust budget cycle is largely because of a progressive income tax system that relies heavily on the stock market windfalls of wealthy Californians. But attempts to change the tax system haven’t gone very far. Also unlikely during an election year — a full-on tax increase. 

That isn’t stopping Assemblymember Alex Lee, a Mipitas Democrat, from trying again on his 1% wealth tax on billionaires and multimillionaires, which he says would generate $20 billion a year. But a Newsom spokesperson quickly shot down the idea, saying Tuesday that “wealth tax proposals are going nowhere in California.”

The governor’s budget reveal is scheduled for 10:30 a.m. and will be livestreamed. A reminder on the timetable ahead:

• Mid-January: The Legislative Analyst’s Office will release its initial review of Newsom’s plan. 
• Late January: Legislative budget committees will start hearings. 
• May 14: Newsom’s deadline to present a revised budget, based on updated revenue estimates. 
• June 15: The Legislature’s deadline to pass a balanced budget (lest they don’t get paid). 
• July 1: The deadline for Newsom and the Legislature to approve a final 2024-25 spending plan.

From CalMatters economy reporter Levi Sumagaysay:

The U.S. Department of Labor on Tuesday released a final rule on worker classification that could supersede Proposition 22, which already is under appeal at the California Supreme Court.

The federal rule could affect the millions of ride-hailing drivers and delivery workers across the nation that companies such as Uber and DoorDash consider independent contractors. In California, the gig companies put an initiative on the ballot that exempted them from state law requiring them to classify drivers and couriers as employees. The measure — which gives gig workers some benefits they didn’t have before but falls short of treating them as employees — was approved by 58% of voters in 2020 but is now being challenged. 

• Acting Secretary of Labor Julie Su, in a statement: “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”

The Labor Department rule restores a standard long used by courts to determine when a worker should be considered an employee or an independent contractor, which the Trump administration had replaced in 2021 with one more favorable to gig companies and other employers. This new rule is set to take effect March 11.

William Gould, professor emeritus at Stanford Law School and a former chairman of the National Labor Relations Board, said Tuesday that the new rule “will prevail over standards set under Proposition 22 for any matters relating to wage and hour,” meaning that Uber drivers and other gig workers should be entitled to minimum wage and overtime. Under Prop. 22, California gig workers are supposed to receive 120% of the state minimum wage for the hours they spend driving or on their way to a ride or delivery, but they are not paid for their waiting time.

Gould said the new rule would not apply to gig workers’ eligibility for workers’ compensation or unemployment insurance.

The Labor Department did not return a request for further clarification Tuesday.

The Protect App-Based Drivers & Services coalition, an alliance of the gig companies, said Tuesday that the rule “should not impact the ability of California drivers to work as independent contractors.”

After failing to reach a labor agreement, the union representing California State University professors, lecturers, and other faculty staff is preparing to strike starting Jan. 22, writes CalMatters higher education reporter Mikhail Zinshteyn.

The California Faculty Association, which seeks 12% raises and other benefits including extended parental leave for its 29,000 members, turned down Cal State’s final offer Tuesday of a 5% wage boost. According to the union, 20 minutes into Tuesday’s meeting with the administration’s bargaining team, it “threatened systemwide layoffs, walked out of bargaining, canceled all remaining negotiations, then imposed a last, best and final offer” to union members.

Cal State, meanwhile, faces a $1.5 billion funding gap and argues that it cannot afford the union’s demands. Yet the rate of pay increases for Cal State executives far outpaces the rate for faculty. A CalMatters analysis found that while the base pay for campus presidents grew by an average of 43% since 2007, base pay for lecturers only rose by 22% on average.

An independent state labor mediator recommended in December that both sides agree to a 7% raise, but that would have forced Cal State to reopen salary negotiations with other unions due to terms agreed to in those contracts, which the university wanted to avoid.

The planned strikes are expected to last for five days until Jan. 26, and will take place across the university system’s 23 campuses. It follows a rolling four-day walkout the union organized in December at four Cal State campuses.

For more on the Cal State labor standoff, read Mikhail’s story.

A lawsuit that could have a huge impact on how California’s local governments pay for infrastructure needed for new development was heard in the country’s highest court Tuesday, as Supreme Court justices listened to lawyers for a resident and El Dorado County argue over a $23,420 impact fee.

As CalMatters housing reporter Ben Christopher explains, at the center of the lawsuit is how far cities and counties can go to justify “impact fees,” which are levied against property owners and developers to offset the toll their projects take on local infrastructure. 

For retiree George Sheetz of Placerville, his fee was unjustified because El Dorado County failed to prove that the fee accurately reflected the impact his small, manufactured home would likely leave on local roads. But county officials argue that not only did they carry out due diligence to justify the fee, but even if they hadn’t, charging specifically calculated fees for each project would be infeasible. 

Building industry groups, conservative property right defenders and Yes In My Backyard advocates are closely watching the case, saying that local governments should be required to do more number-crunching before imposing fees on new home construction. High impact fees — which a 2018 report found ranged between 6% to 18% of the local median home price in California cities — are also one of the reasons why it’s so expensive to build housing in the state. Then again, requiring cities and counties to clear an even higher bar of work, El Dorado attorneys argue, can potentially bring development to a grinding halt.

Now it’s up to the justices to figure out if impact fees should be treated as if the government were seizing a homeowner’s property, a simple tax or something in between.

• Justice Amy Coney Barrett: “It seems kind of like a nightmare to figure out where the line should be drawn.”

To learn more about this case and its potential impact on California, read Ben’s story.