How could California’s more favorable budget outlook impact contracts with state employees?

In unveiling its budget overview last week, the nonpartisan Legislative Analyst’s Office said that while the state’s fiscal future is still uncertain, “the Legislature likely will need to address deficits in the future, for example by reducing spending or increasing taxes.”

The budget analysts recommended the state avoid new financial commitments, particularly those that are ongoing, to ensure California has enough resources to erase the $2 billion deficit the LAO projected in the fiscal preview.

The deficit is a dramatic improvement compared to what the LAO predicted last year: A $68 billion shortfall. Gov. Gavin Newsom and lawmakers took steps to cut spending and draw from budget reserves, which reduced the deficit to about $47 billion for the current fiscal year.

Several state employee contracts expire in 2025, which means negotiations over compensation and benefits will begin in the new year. One of California’s most expensive union contracts, which covers correction officers, will be up for renewal near the end of this fiscal year in June as the state continues to face double‑digit operating deficits.

Asked how the “no capacity for new commitments” could impact state employees who will be bargaining for a new contract next year, the LAO said the budget outlook assumes employee compensation costs will increase.

Ann Hollingshead, the LAO’s principal fiscal and policy analyst, said those anticipated costs are based on the state’s contracts with the public sector unions. When those contracts expire, the LAO uses a “compensation index” to adjust for future costs to ensure California doesn’t underestimate how much money it needs to pay its employees.

Earlier this year, the administration directed departments to cut operation costs by nearly 8% and eliminate thousands of vacant positions to help address the state’s budget concerns.

The LAO said last week that it’s unclear how much progress the administration has made in its attempts to eliminate unfilled state jobs. The LAO has been skeptical that the state could successfully achieve the savings it hoped for with the operations cut.