Gavin Newsom expects a deficit this year. What does that mean for state worker contracts?

Unions representing most of California’s state employees will negotiate new contracts this year, and early signs suggest the deals could be lean ones.

Both ends of the bargaining table face formidable obstacles.

The state faces a projected $24 billion budget deficit, and experts say that estimate might have snowballed by the time Gov. Gavin Newsom unveils his budget for the 2023-2024 fiscal year on Tuesday. The threat of a recession also looms in the background.

At the same time, workers across the state are feeling the financial squeeze as consumer prices soared by historic amounts last year.

“If all other things were equal, I think this particular administration would be inclined to grant pay raises,” said Michael Genest, who served as the state’s finance department director under former Republican Gov. Arnold Schwarzenegger.

“But all other things are not equal.”

The Legislative Analyst’s Office called the projected multi-billion dollar deficit “the weakest performance the state has experienced since the Great Recession” in a November report. The office cautioned that if a recession were to begin soon, state revenues could fall $30 billion to $50 billion.

What could the deficit mean for worker pay?

State worker raises generally kept pace with inflation prior to 2008, according to a Sacramento Bee analysis of data from the California Department of Human Resources. But after the Great Recession hit, workers in most bargaining units saw their pay stagnate and their purchasing power decrease. Some workers were just starting to see their contract raises catch up with inflation when the COVID-19 pandemic hit and consumer prices soared at historic rates.

High inflation would usually be a strong argument for raising pay. But budget deficits typically call for cuts in public spending, not increases.

State employers face a tough decision. Some public employees are paid under the market rate for their roles and could leave for the private sector if raises are withheld. Public employee unions are also struggling with retention, which could worsen if a recession hits and older workers retire faster than departments can hire new ones.

“If they don’t increase their pay, they’re not going to retain qualified employees,” said Gary Messing, a Sacramento-based labor lawyer and chief negotiator for the California state firefighters’ union, Cal Fire Local 2881.

Messing expressed some skepticism about the true size of the deficit, explaining that public employers often cite a poor economic outlook as an excuse to gain more leverage during bargaining. Even if the projected shortfall did come to pass, Messing argues the state could afford to pay workers raises by using some of its $23 billion in “rainy day” reserves.

“They may have a deficit, but the state also has a lot of money,” he said. “It’s a matter of prioritizing.”

Newsom has positioned his administration as union- and labor-friendly, signing laws that expand protections for farm laborers and fast-food workers. Withholding pay increases from public employees could alienate and disenchant the unions and their members.

California furloughs

It’s unclear, though, how far the governor would go to please the unions. The single biggest labor contract up for negotiation this year is for the roughly 100,000 workers represented by SEIU Local 1000. Its last contract raised pay for all workers by 7% over three years and provided a $260 monthly health care stipend.

California has previously asked workers to take pay cuts in the form of furloughs and personal leave programs during tough budget years. Gov. Schwarzenegger’s “furlough Fridays” forced most state employees to stay home two to three days per month without pay.

There has been no discussion of furloughs or pay cuts yet this year. But the last time the state faced a large deficit in 2020, Newsom used a furlough-like program to cut state worker pay for a year, giving public employees two days of paid leave per month in exchange.

Genest said he wouldn’t be surprised if Newsom chose to freeze salaries to cut costs. The state has an estimated $27.7 billion in reserves, but Newsom might not want to spend much of it with a potential recession on the horizon.

“It would be foolhardy in the extreme to use that reserve to add to the baseline cost of government,” Genest said, in reference to contract raises. “To do that with your reserve would be really, really fiscally stupid.”

This story was originally published January 9, 2023 at 5:30 AM.