The Source Blog

On May 14, California Governor Gavin Newsom released the May Revise to his initial January proposal for California's 2026-2027 fiscal year.  The revised budgetary proposal totals $246 billion in total general fund spending, a reduction of $1.8 billion from his initial January proposal.  The bill prioritizes reducing the state's long-term deficit through 2028 by cutting general fund spending, despite higher-than-anticipated tax revenues in anticipation of a volatile market, federal budget cuts, and rising costs from the Iran conflict.

The initial proposed budget was shaped by federal funding cuts to Medicaid and food assistance under the One Big Beautiful Bill, and concerns regarding revenue reliability from tech and federal policies.  Additionally, the budget was based on projected state revenues, which were difficult to estimate due to differing economic forecasts.  The bill also did not call for new funding streams, despite rising state costs and federal cuts to safety-net programs.

The May Revision introduced new budgetary proposals in response to persisting federal funding cuts, an uncertain tech future and potential bubble bust, and rising costs due to the Iran conflict.  Governor Newsom expressed a need to reduce the state's structural deficit in the long term, despite a rapid surge in tax revenue driven by AI and tech growth.  The May Revise makes broad divestments in immigrant healthcare, Medi-Cal benefits, and housing and homelessness; however, it proposes larger investments in low-income subsidies, managed care, provider payments, and nutrition.

Medi-Cal

Managed Care Organization Tax

The May Revision proposes renewing the Managed Care Organization (MCO) tax, which is set to expire on December 31, 2026.  Revenue from the renewed tax is projected to contribute $575 million in 2026-27, $2.3 billion each in 2027-28 and 2028-29, and $1.7 billion in 2029-30 towards Medi-Cal and maintaining targeted rate increases for mental health care.  The May Revision reserves $1.3 billion in 2025-26, $2.4 billion in 2026-27, and $150 million in 2027-28 to accommodate increases in managed care and provider costs and payments.

Spendings

The May Revise proposes a $2.2 billion increase in general fund reserves for Medi-Cal expenditures from the initial Governor's Budget to account for federal delays in approving the 2025 Hospital Quality Assurance Fee program and increased health care costs for managed care, fee-for-service, and Medicare.

It also reserves $262 million in 2026 and $33 million in 2027 and 2028 to support counties in implementing Medi-Cal eligibility changes.

Benefit Reductions

To balance increasing allotments for rising Medi-Cal costs and the implementation of federal policy changes, the May Revise proposes broad benefit reductions to reduce the structural deficit.

First, the budget proposes a $34.6 million reduction due to retroactive Medi-Cal coverage being shortened from 3 months to 1 for the Affordable Care Act adult expansion population and 2 months for all other members.

It also results in significant reductions for Senior beneficiaries.  The budget proposes reinstating Medi-Cal Asset Tests for seniors and disabled adults, which would result in a $278.3 million General Fund reduction and $495.6 million in ongoing savings.  It also introduces a rate cap for Program of All-Inclusive Care for the Elderly (PACE) organizations to reduce General Fund spending by $33.7 million in 2026-27 and $80.9 million on an ongoing basis.

The revision also narrows eligibility criteria and service definitions for two key Medi-Cal programs.  Reductions to the enhanced care management benefit are projected to reduce General Fund spending by $41.4 million in 2026 and $99.2 million ongoing, while reductions in community support services, referral pathways, and eligibility are projected to reduce spending by $26.9 million in 2026-27 and $51 million ongoing.

Finally, the revise estimates a General Fund reduction of approximately $5.4 million in 2026-27 and $13.1 million ongoing by eliminating acupuncture benefits.

Divestments

The May Revision projects a $3.7 billion decrease in Medi-Cal General Fund Expenditures, driven by reduced costs from budgetary solutions, lower managed care base costs, and revised timing assumptions.

The revise also proposes an ongoing $25 million General Fund reduction, beginning in 2027-28, to redirect medical loss ratio remittances to the General Fund.

Covered California and the ACA

The May Revision includes large investments in Affordable Care Act subsidies for middle- and low-income patients, largely in response to the federal government's refusal to renew them.  The revision projects a $1.5 billion increase from the Governor's budget to account for OBBBA restrictions on ACA access, including work and community engagement requirements, restrictions on immigrant eligibility, eligibility redeterminations, and hospital quality assurance fees.

The May Revision proposes $300 million in state-funded healthcare subsidies through the Health Care Affordability Reserve Fund, an increase of $110 million over the Governor's initial budget.  The proposal is designed to fill the gap left by expiring federal tax credits for Californians who do not qualify for Medi-Cal but rely on ACA marketplace coverage.

The investment would preserve $0 monthly health plans for lower-income Californians, expand financial assistance for middle- and working-class families, and extend new state subsidies to Californians earning up to 200% of the federal poverty level, an increase from the previous 165% threshold.  The revision also includes maternity leave provisions for K-12 and community college educators.

Immigrant Healthcare

The May Revise projects a $583.8 million general fund reduction due to federal OBBBA policy prohibiting states from providing emergency Medicaid services for immigrants on “unsatisfactory” specified immigration statuses.  Medi-Cal members on these statuses will receive all covered Medi-Cal services through the fee-for-service delivery system effective January 1, 2027.

Additionally, the May revision proposes increasing monthly premiums for adults on specified immigration statuses from $30 to $50.  This would generate approximately $427.3 million in general fund savings annually, effective July 1, 2027.  The specified unsatisfactory immigration statuses include refugees, asylees, certain domestic violence and trafficking survivors, and Special Immigrant Visa holders from Afghanistan and Iraq.

CalFresh Budget

The May revise introduces a $3.7 billion expenditure in CalFresh and nutrition expenditures.  $30 million would be allocated to one-time contributions to county administration workloads and to food banks.  The revision also includes a $37 million general fund increase for costs exceeding the target.  Additionally, the state has exceeded a federal administrative expense target and has requested a review of the federal limit.  The initial budget noticeably did not make any investments in CalFresh despite strong opposition to federal budget cuts to food assistance.  The federal "One Big Beautiful Bill" (H.R. 1), signed into law in July 2025, will restrict CalFresh eligibility and reduce benefits for hundreds of thousands of Californians, including imposing stricter work requirements and the loss of eligibility for immigrants.  Despite changes from the initial budget, critics remain unhappy that the state isn’t doing enough to counter the effects of the new federal limitations.

Housing

The May Revision takes several steps to reduce the costs of affordable housing development and accelerate construction.  It would prohibit local governments from charging impact fees on affordable housing projects seeking state funding, while incentivizing broader fee waivers through competitive housing programs.  The revision also reappropriates $7 million toward housing infrastructure and adds six permanent positions with $838,000 in annual funding to reduce complaint wait times at the Civil Rights Department.

Next steps

Looking ahead, the Senate Budget and Fiscal Review Committees and the Assembly Budget Committee will hear a budget bill that itemizes expenditures and will assign it to the lower subject-area subcommittees to act on the January and May proposals.  Upon receipt of subcommittee recommendations, the Budget Bill will be sent to their respective houses in preparation for a conference committee to resolve differences between budget versions to meet the state constitutional deadline of June 15 for an approved budget by the Legislature.  Following approval, Governor Newsom is expected to sign the bill, but further modifications are expected past the June deadline.  The Source will keep readers informed of any and all health-related revisions to the budget in the near future.

 

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