The Source Blog

On January 9, California Governor Newsom released his first proposed budget for California’s 2026-2027 fiscal year, outlining $348.9 billion in state spending, $30 billion more than the current 2025-2026 budget.  California is facing challenges as federal funding for key programs has diminished under President Trump's One Big Beautiful Bill.  Additionally, the budget is based on projected state revenues, which are difficult to determine given differing economic forecasts.

Trump's One Big Beautiful Bill reduces federal funding for California's Medicaid program by $30 billion a year and makes significant cuts to food assistance, meaning the state will have to cover these shortfalls by raising funds, cutting benefits, or some combination of both.

In November of last year, the state’s Legislative Analyst's Office estimated an $18 billion deficit, but the Governor's plan only estimates a $2.9 billion shortfall, reflecting a more optimistic economic forecast.  Approximately 4% of the state's budget could come from taxes on the top 12 tech companies, meaning that any tech bubble collapse could necessitate significant spending changes.  Federal policies, including those addressing trade, tariffs, and immigration, could also weaken economic and job growth more than expected.

Despite rising state costs (especially in healthcare), federal cuts to safety net programs, and the potential for economic volatility, the budget proposal does not call for new funding streams, such as tax increases.

Medi-Cal and Covered California

Cuts in federal funding mean the state will have to spend $1.1 billion more on Medi-Cal (which provides care to more than 14 million low-income residents) just to maintain current coverage levels.  Overall, the 2026-2027 budget proposal proposes $222.4 billion in Medi-Cal spending, a $2.4 billion increase over the previous year.  This is affected by the end of the Medical Provider Interim Payment Loan and lower tax revenue from the Managed Care Organization Tax (a state fee on health plans, which is impacted by the One Big Beautiful Bill).

Covered California, the state’s insurance marketplace established through the Affordable Care Act (ACA), provides coverage for 1.8 million residents.  The federal expiration of the enhanced premium tax credits means that this population will see premiums rise by an average of 97%.  The budget proposal does not include funds to address affordability or access through this plan.  Estimates are that at least 174,000 state residents will lose ACA coverage when the subsidies expire.

Immigrant Healthcare

The federal One Big Beautiful Bill terminates eligibility for specific immigrant categories for federally funded full-scope Medi-Cal.  The Governor's budget proposal would move these people to restricted-scope Medi-Cal, which provides limited health coverage, primarily for emergency care and pregnancy-related services.  Critics have proposed that California provide funds so this population could return to full-scope care, but that would be a costly endeavor.

Cuts to immigrant coverage from the 2025-2026 budget have been carried over to this budget proposal, including the freeze on Medi-Cal enrollment for undocumented residents that began on January 1, and the upcoming implementation of a $30 per month premium.  The budget proposal also creates work reporting requirements for immigrant populations, which can be challenging to document.

Housing

The budget represents a $1.3 billion reduction in spending on housing and homelessness.  In previous years, the state included $500 million to support the Low-Income Housing Tax Credit, but the current proposal no longer includes this.  And backing for a fund to help cities and counties to provide housing and services for the homeless population has been reduced from $1 billion to $500 million.  Newsom's proposal moves $1 billion in funding from mental health services to housing and treatment for people experiencing homelessness, a step that will impact behavioral healthcare providers relying on funding for services.

Nutrition

Federal cuts, eligibility changes, and cost-sharing mandates threaten the effectiveness of the CalFresh program, California's version of the federal Supplemental Nutrition Assistance Program, which serves over 5.5 million state residents.  Advocates are hoping the state can step in to provide additional assistance in the wake of federal shortcomings, but it was not included in the Governor's proposal.

Next Steps

The Governor’s proposed budget is just the first step in the California budget process.  Next, state agencies will prepare proposals, resulting in a Governor's "May Revision" update to the budget proposal that will also consider more recent economic forecasts.  The bill will be submitted to relevant committees in both the Senate and Assembly and eventually make its way to the Legislative Analyst's Office for non-partisan review and analysis.  By June 15, the Legislature must pass the final budget, with the new fiscal year beginning on July 1.  In recent years, it has not been uncommon for the state legislature to restore funding for various services in the final budget bill after the Governor proposed cutting them in earlier iterations.  The first draft of the budget represents a difficult balancing act, with conditions creating narrow options for the state and requiring difficult tradeoffs.  The Source will continue to follow the state's budgetary process and its impacts on healthcare access and cost.

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