California Democrats aren’t sold on Gavin Newsom’s plan to cut the budget deficit. How they disagree

Assembly Democrats are at odds with California Gov. Gavin Newsom on a handful of big issues — including proposed cuts to Medi-Cal provider rate increases and tax deduction suspensions — as lawmakers negotiate a budget to close an estimated $45 billion deficit.

The Legislature must pass a spending plan by June 15 for lawmakers to receive their paychecks. That means Newsom, Assembly Speaker Robert Rivas, D-Hollister, and Senate President Pro Tem Mike McGuire, D-Healdsburg, will need to reach a deal soon.

Rivas, McGuire and Newsom administration officials are not talking publicly about any deals. But some lawmakers and budget subcommittee chairs have been more open about their feelings toward Newsom’s proposed budget. Here are some of the potential budget debates Assembly members are already having.

Changes to Medi-Cal provider rate increases

Newsom’s revised budget, which he presented earlier in the month, cuts $6.7 billion in Medi-Cal provider rate increases that were planned for January 2025.

The rate hikes were to come from higher taxes on managed care organizations, or insurers, that lawmakers approved last year and in March. The MCO tax allows California to draw down additional federal money to help fund Medi-Cal, the state’s version of the Medicaid program that provides health insurance for low-income residents.

Assemblywoman Akilah Weber, D-San Diego, who chairs the Assembly Budget Subcommittee on Health, said during a May 15 meeting that some lawmakers took “very hard votes” last year and in March on MCO tax increases and now “are quite upset and feel like this process has not been very honest.”

Weber asked for solutions from Department of Finance representatives who presented the changes. She said hospitals and clinics are losing services and labor and delivery units and pediatric wards are closing.

“So, we know it’s happening,” Weber said. “This was one part of the solution to that issue, and we’re taking that away.”

Suspending tax deductions

The governor’s revised budget would suspend a net operating loss tax deduction for businesses with California income of more than $1 million during tax years 2025, 2026 and 2027. It would also cap businesses’ tax credit usage at $5 million per company.

Assemblyman Chris Ward, D-San Diego, during a May 16 meeting of the Assembly Budget Subcommittee on State Administration, expressed concerns about suspending the credits.

He said the deduction suspension “solves something in the short run,” but it “creates, I think, incredible uncertainty for the business community that translates into potential impact for future economic opportunity, which itself is going to generate tax base for future years as well.”

Ward expressed similar concerns about the tax credit cap.

“Something’s got to give, of course, in this budget,” he said. “And a broad brush sort of overture — that we’re going to suspend all of these credits — I worry might be a little bit of penny wise, pound foolish.”

Discontinuing homelessness grants

Newsom wants to cut $260 million in Homeless Housing, Assistance and Prevention, or HHAP, grant program money promised to cities and counties to help address homelessness.

His revised budget also does not contain money for a sixth round of the program, worrying local leaders who have come to rely on the funding to pay for shelters and other services.

Fullerton Assemblywoman Sharon Quirk-Silva, a Democrat who chairs the Assembly Budget Subcommittee on State Administration, said HHAP is among the housing programs she and her colleagues are working to protect.

Declining to close additional prisons

Progressive Assembly members are pushing Newsom to close more prisons, as the independent Legislative Analyst’s Office has suggested.

The LAO in February said closing five additional prisons would save California $1 billion per year. Newsom’s administration has moved to close three prisons and end a lease with a private prison company on an additional facility, according to the California Department of Corrections and Rehabilitation.

His revised budget would deactivate 46 prison housing units with 4,600 beds, resulting in $80.6 million in savings.

The LAO reported prisons will operate with 15,000 empty beds during the 2024-2025 fiscal year, reaching 19,000 by 2028.

Assemblyman Isaac Bryan, D-Los Angeles said the state is “running a 15,000-person empty hotel through the state prisons.”

He and other lawmakers would like to see Newsom close more facilities rather than cut funding from subsidized child care and social safety net programs.