California’s budget was hemorrhaging red ink 15 years ago as the Great Recession clobbered personal income tax revenues and then-Gov. Arnold Schwarzenegger and legislators were desperately trying to balance their books.

Dan Walters

CalMatters

Opinion

One of many ploys they adopted was a maneuver to leverage more health care money from the federal government. The state would levy a tax on managed care health care organizations — Kaiser Permanente was and is by far the largest –— and use the proceeds to support Medi-Cal, the state’s health care system for the poor, thereby qualifying for more federal matching funds.

Ever since, the Managed Care Organization Provider Tax has been employed sporadically in one form or another.

A Comprehensive Deal and Its Unraveling

Last year, after protracted negotiations, a comprehensive deal was struck to raise $19 billion from a renewed tax and qualify for another $16 billion in federal funds. It would expand services to Medi-Cal recipients — more than a third of the state’s 39 million residents — while increasing payments to the doctors, hospitals and other health care providers.

The state budget, which was again plagued with deficits, would get a few billion dollars.

The agreement began to fall apart just months later, when Gov. Gavin Newsom conceded that the state faced even larger deficits, thanks to a massive error in projecting revenues, and he wanted to grab a much bigger share of the health care tax proceeds to help cover the shortfall. The final budget deal unveiled in June relies on a big chunk of the health care money.

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Proposition 35: A Game-Changing Ballot Measure

However, in the meantime, the coalition that negotiated the 2023 deal had qualified a measure for the November ballot, Proposition 35. It would make the health care tax permanent, but limit diversions for non-medical budget items to a few billion dollars, while pumping the bulk into expanding Medi-Cal services and reimbursing providers.

Prop. 35 would, in effect, throw the state budget back into the red by denying it as much as $12 billion over the next few years that Newsom’s budget had assumed would be available.

The governor makes no secret of his disdain for the measure, although he hasn’t formally opposed it.

“This initiative hamstrings our ability to have the kind of flexibility that’s required at the moment we’re living in,” he told reporters recently. “I haven’t come out publicly against it, but I’m implying a point of view. Perhaps you can read between those many, many lines.”

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An Unusual Battle of Interests

It makes for an odd set of adversaries.

On one side you have Big Medicine, major players in California’s biggest industry, capable of spending tens of millions of dollars to pass the ballot measure. On the other are the governor, smaller medical care groups and non-medical interests that rely on the state budget.

Prop. 35’s proponents contend that the health care tax money has always been intended to improve medical care, not balance the budget.

“The best way to protect our Medi-Cal program and those vulnerable patients is to invest in it,” Jodi Hicks, co-chair of the initiative coalition and president of Planned Parenthood Affiliates of California, told CalMatters. “Every day that a patient can see a doctor is a good day, and we need to invest and ensure that’s happening for as long as we can.”

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There are two other aspects of the burgeoning conflict. One is that federal officials who must approve waivers allowing the health care tax to qualify for federal funds look askance at using the money for non-medical purposes.

The other is that Newsom’s governorship will expire in a couple of years and, as that date draws closer, his ability to influence events will wane. He’s not a lame duck yet, but passage of Prop. 35 over his objections would be a symbolic move in that direction.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times.

CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more columns by Dan Walters, go to calmatters.org/commentary.

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