By Adam Ashton, CalMatters
Gov. Gavin Newsom addresses the media during a press conference unveiling his revised 2025-26 budget proposal at the Capitol Annex Swing Space in Sacramento on May 14, 2025. Photo by Fred Greaves for CalMatters.
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The Money Game: How Newsom’s Labor Deals Affect California’s Budget
A Strategic Pause on Healthcare Spending
In a bold maneuver, California Governor Gavin Newsom’s office has struck a series of deals with public employee unions that potentially reshape the state’s fiscal landscape. These agreements are designed to save money in the short-term by delaying payments towards one of California’s most substantial debts: the health care benefits promised to public servants upon retirement.
What’s at Stake: The Numbers Behind the Deals
This month, Newsom’s administration negotiated eight significant agreements that will pause state spending for two years on retirement health care benefits. According to estimates from May, this means the state could free up over $700 million in the upcoming budget year. However, this short-term relief comes at a great cost—a monumental promise to state employees that totals around $85 billion needed to fully fund their future health care benefits.
Balancing Short-Term Needs with Long-Term Obligations
The urgency of these agreements coincides with another pressing financial situation: California is grappling with a $12 billion budget deficit. In light of this deficit, Newsom is asking unions for significant concessions, such as unpaid leave, which effectively reduces take-home pay for public employees over the next two years. This strategy could negate any raises state workers were expecting this year.
Sweetening the Deal: Unions Get a Short-Term Win
Despite these cuts, seven of the proposed labor agreements do include a silver lining: both the state and workers will suspend contributions toward retirement health care costs for the next two years. This change will unlock between 1.7% and 4.5% of their earnings, providing a much-needed cash infusion into workers’ wallets.
Voices from the Field: Union Perspectives
“This offers a little relief in a state where the cost of living is incredibly high,” says Ted Toppin, executive director of the Professional Engineers in California Government. Toppin emphasizes that the temporary financial boost allows members to keep more money in their pockets during a challenging economic period.
The Service Employees International Union Local 1000, which represents approximately 100,000 California civil servants, celebrated a new agreement with the Newsom administration that mirrors these benefits, emphasizing that this will boost take-home pay for members.
Historical Context: A Shift in Funding Strategy
Former Governor Jerry Brown pioneered the pre-funding plan for retiree health care benefits, mandating both the state and employees contribute a portion of their paychecks. He implemented these measures after concerns that the existing pay-as-you-go system would rapidly consume state resources due to rising health care costs.
Currently, California anticipates spending $3 billion on health benefits for retired civil servants—up from $1.6 billion in the 2016-17 budget year.
The Long Game: Risks and Considerations
While the contracts initiated by Brown aimed to establish a trust fund for retiree health care benefits, allowing the state to transition these expenses away from general funds, the current pause presents significant long-term risks. Experts from the Legislative Analyst’s Office caution that suspending contributions increases the unfunded liability and jeopardizes the likelihood of fully funding these benefits by the targeted deadline.
Predictably, the state expects to save an impressive $100 million annually just from the prison guard contract by halting payments for correctional officers’ retirement health care.
Looking Forward: Commitment Amidst Challenges
Previously, during the early days of the COVID-19 pandemic, Newsom had permitted state workers to postpone their contributions. However, those funds were restored in the 2023-22 budget. Camille Travis, spokesperson for the state human resources department, expressed continuous commitment, noting, “The state remains dedicated to pre-funding retiree health, and this suspension will address the budget shortfall in the near term.”
Ultimately, California’s fiscal future hinges on striking a delicate balance between immediate needs and long-term obligations, leaving many to wonder how today’s decisions will echo into tomorrow.
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.
