With California facing a projected $68 billion deficit in the coming budget year, Gov. Gavin Newsom has sought “major reforms” to get funding next year from a costly plan to raise the statewide minimum for health care workers to $25 per hour

Newsom told the Times last week that his staff has been working behind the scenes with Democratic leaders in the state Legislature on how to move forward with the minimum wage bill in light of state budget concerns. The changes, which must be approved by state lawmakers next year, were “all part of an agreement” with union leaders before he signed the bill, Newsom said.

We knew exactly where we stand in terms of finances. We were very honest with these guys. I said, ‘No way,’ and we’ve been working on something, and it will reveal itself in a few weeks,” Newsom said last week, recalling the conversations that led to the bill’s passage.

It’s unclear whether Newsom is suggesting whether he wants to limit the higher health care minimum wage to fewer workers, or whether he wants to delay or pause implementation of the increase.

Newsom discussed health care pay a week before Thursday’s release of a report by the Legislative Analyst Office, a nonpartisan government body that reviews policy for the state Legislature, that estimates the state will face a $68 billion budget deficit in the 2024-25 fiscal year could experience. The state budget is determined on the basis of an annual budget calendar that starts on July 1 and ends on June 30.

The bleak financial picture was revealed later than usual this year due to extensions of federal and state income tax filing deadlines for 2022 from April to November, leaving lawmakers and the governor to adopt the current state budget in July without a clear understanding of the state budget . tax revenue.

With tax collections underway, the LAO reports a severe decline in revenues and estimates that California had a $26 billion deficit in the fiscal year ended June 30, with similar deficits expected this year and next. Analysts expect an additional deficit of $30 billion per year from 2025-2026 through 2027-2028, for a potential deficit of $155 billion over six years.

Gabriel Petek, deputy chief legislative analyst at the LAO, said the report outlines a “serious budget problem.”

California’s progressive tax structure already makes the state budget disproportionately dependent on the wealthiest, including tax windfalls that accrue when companies seek investors through initial public offerings and

the ups and downs of the stock market.

The LAO said part of the revenue decline is an expected decline from abnormally strong revenue growth in previous years, when federal COVID-19 stimulus funding artificially increased income taxes, resulting in a record state surplus.

Analysts also blamed the Federal Reserve for raising interest rates, some of whose effects are “outsized for California,” the report said. Investments in California startups and the technology industry fell significantly, with 80% fewer companies going public in 2022 and 2023 than in 2021, for example.

California entered an economic downturn in 2022, with the number of unemployed rising by nearly 200,000 since the summer of 2022, the LAO report said.

The LAO said conditions exist for Newsom to declare a budget emergency and draw on budget reserves to cover part of the deficit. Analysts have suggested other ways to reduce the deficit, including saving $16.7 billion by reducing education funding under Prop 98 to the constitutional minimum.

Both the governor and Legislature face a significant challenge with the 2024 budget, HD Palmer, a spokesman for the California Department of Treasury, said in a statement. The administration will present its plan to close the budget gap when the governor sends his proposal to the Legislature next month.

After cutting more than $30 billion from the state budget this summer, Newsom and lawmakers expected a further decline in revenues. Newsom in particular tried to be cautious and

vetoed

dozens of bills in the case that he said would have cost the state nearly $19 billion in unaccounted costs, including $11 billion in current expenses.

SB 525, the health care minimum wage law, was one of the last bills signed by the governor and, according to recently released estimates from the Treasury Department, the most expensive.

Under the law, workers at large health care facilities will earn $23 an hour starting in June, $24 an hour in 2025 and $25 an hour in 2026. That applies to all staff, including money launderers and workers in hospital gift shops.

Workers at independent rural hospitals and facilities that serve high numbers of Medicare and Medi-Cal patients will see a minimum wage of $18 per hour next year, gradually rising to $25 per hour by 2033.

The bill was significantly amended in the final hours of the legislative session, reflecting controversial deals between hospital lobbyists and labor unions. The late agreement gave the Legislature and the Newsom administration little time to conduct a detailed financial analysis before final votes.

The California Treasury Department said publicly in November, after Newsom signed the legislation, that the pay increase for health care workers would cost $4 billion in 2024-2025, the first full fiscal year after implementation began.

The

The bill currently does not contain any mechanism that would allow the state to defer wage increases during economic downturns.

The department said half of the money for the wage increase would come directly from the state’s general fund, while the other half would be paid from federal funds earmarked for providers of Medi-Cal, California’s Medicaid program.

Laurel Lucia, director of the UC Berkeley Labor Center’s health care program, said a yet-to-be-released university estimate suggests costs in the first year will be closer to $300 million from general funds than the state’s forecast . The labor center developed the estimate based on the final law to help inform policymakers, she said.

Newsom said he was determined he could not sign the bill into law without promises from key players that changes would be made during the legislative session that begins in January.

Tia Orr, executive director of Service Employees International Union California, said the state’s financial health is consistent with raising wages for 500,000 health care workers, nearly half of whom receive some form of government assistance.

Orr said SEIU California is committed to working with the administration and legislature “to ensure safeguards are in place to ensure this critical measure is taken in a manner that protects California’s fiscal health, just as we did in negotiating the latest statewide minimum wage increase.

The unions agreed to work with the governor’s office to develop a methodology for implementation if California enters a recession, although those criteria have not yet been established, Orr said.

Newsom said that once the January budget is unveiled, “tradeoffs” will be considered, portending “a serious conversation about what the risks or the rewards are.”

Newsom is expected to unveil his budget plan for the coming fiscal year on Jan. 10.