Gov. Gavin Newsom’s First California Budget Deal Is Near. Here’s What To Watch For

The first California budget deal under Gov. Gavin Newsom is just days away.

Newsom and legislative leaders must finalize their spending plan for the coming fiscal year this weekend for lawmakers to meet their June 15 constitutional budget deadline.

Democrats had hoped to close out the joint Senate-Assembly budget conference committee by Friday — likely with a late night hearing — in hopes of a budget passing the full Legislature next Thursday, two days ahead of next Saturday’s deadline.

But it now appears that talks between Newsom, Assembly Speaker Anthony Rendon (D-Lakewood) and Senate President pro Tem Toni Atkins (D-San Diego) aren’t gelling as fast as hoped.

So, while a Friday conference committee closeout is still possible, the weekend is looking more likely. (That’s good news for Golden State Warriors fans, since game four of the NBA Finals is Friday night.)

If this happens, it would appear to set up a final vote on the Senate and Assembly floors next Friday.

Democratic negotiators declined comment Thursday citing the fragile moment in talks, and Newsom’s Department of Finance was unresponsive.

But the top Republican on the Assembly budget committee, Jay Obernolte (R-Hesperia), is warning against too much new, ongoing state spending.

“We should end the fiscal year with over $20 billion in reserves, which is great,” Obernolte told CapRadio’s Insight on Thursday. “But we need to be mindful of the fact that in even a moderate recession, we’re going to have revenue loss of about $40 billion. So to put it another way, $20 billion is a great start — we’re about halfway there.”

As we await a final deal, here's a scouting report on what to watch for:

• The final spending plan is expected to largely rely on the framework and revenue projections in Newsom's May revise of the budget, which estimated a $21.5 billion surplus.

That proposal included constitutionally required set-asides of $81.1 billion for K-12 and community college funding under Proposition 98, and $16.5 billion for the state's “rainy day fund” reserve under Proposition 2. Newsom touted both as record highs.

• Among the biggest sticking points right now: conforming California’s tax code to federal law, which changed under President Trump’s and Congressional Republicans’ 2017 overhaul. Newsom, who is pushing hard for the conformity, wants to use the extra state revenue to expand California’s earned income tax credit.

Obernolte said this could make the tax situation “less complex” for businesses and residents. “As conservatives, we’re always wary of tax increases, but I think that tax conformity is in general a good thing,” he said.

But he’s warning against using the extra money the state would bring in under Newsom’s conformity proposal “as an excuse to spend more somewhere else.”

Obernolte also said that, while he believes earned income tax credits have merit because they encourage work and lift people out of poverty, some of the proposals under consideration lack “statistical evidence.”

• Another big sticking point is whether to extend an expiring tax on health insurers known as the MCO tax, which former Gov. Jerry Brown pushed through in 2016. It’s backed by legislative Democrats but opposed by the Newsom administration.

So, what will be in the budget deal?

• Newsom and Democrats in both chambers all want to extend Medi-Cal to young adults ages 18 to 25 who are living in California illegally. Senate Democrats also want to include seniors, but that might need to wait for another year’s spending plan.

Obernolte said that, instead of “expanding a failed program,” he wants lawmakers to fix it so that, for instance, doctors can afford to take on patients. Right now, he argues, many doctors refuse to see Medi-Cal patients due to the program’s low reimbursement rates.

• The other big-ticket health care item likely to be included is expanding subsidies for low-income residents on the state’s health care exchange, Covered California — and extending them for the first time to middle-income residents. That would be paid for by a new statewide requirement that all individuals have health insurance, replacing the now-defunct Affordable Care Act’s individual mandate canceled by Congressional Republicans and President Trump.

But the size of the middle-class subsidies is not yet clear. Senate Democrats are proposing twice as much as Newsom and the Assembly; the additional cost would come from the general fund, meaning it's competing with other budget priorities.

Obernolte, however, is urging caution. “I understand and agree with the premise, which is to make sure that more Californians are covered by health insurance,” he said. “It fixes the system, makes it better for everyone. Unfortunately, it’s not clear to me that there’s any statistical evidence that extending these subsidies to the income ranges the governor’s proposing would have that effect.”

• Newsom’s $1.75 billion housing proposal appears likely to survive largely intact. It includes $500 million to construct roads, water and sewage at infill development sites where housing can’t yet be built. And his call for $1 billion for homelessness also appears in good shape. It includes $650 million to local governments for homelessness emergency aid, and money for mental health professionals and homeless college students.

• Other unresolved budget issues include a “911 fee,” which critics call a “text tax,” to fund the modernization of the state’s outdated emergency response system; and money for clean drinking water in disadvantaged communities, which now looks like it won't come from a “water fee,” as Newsom had asked. Instead, other revenue sources are under consideration.

• And Newsom’s proposals for universal pre-kindergarten and higher ongoing University of California and California State University funding are expected to be included, though specific details aren't yet clear. Assembly Democrats are pushing for more preschool slots and higher rates for providers.

Obernolte said that, while he’s a “big fan” of early childhood education, he would “really prefer us to shore up our K-12 system and fix some of the systemic, cultural problems that exist there — before we talk about expanding and creating new, other educational programs.”

The conference committee closeout only deals with the budget bill itself. As many as two dozen bills with policy changes that accompany the budget, known as “trailer bills,” will begin to surface next week.