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On January 10, 2025, Governor Newsom released his proposed California state budget for the 2025-26 term. Following last year’s $46 billion budget shortfall, the Governor's new budget looked quite different this year. Specifically, the budget had no deficits, reporting a projected surplus of $363 million due to the state's prediction that it will collect almost $17 billion more in revenue than was originally planned. In fact, this year is slated to go down as California's second-largest state spending plan ever, at a value of almost $322 billion.

Overview of the Budget

The upward trend in the state’s revenue occurred due to a confluence of influential changes. Primarily, since California’s 2024 Budget Act was signed, the state has seen major improvements in the economy, stock market, and cash receipts. In June 2024, Californian lawmakers made a deal to cut $16 billion in spending and delayed an additional $3 billion in funding for various services while drawing $12 billion from the state’s rainy-day fund for two fiscal years. However, by January 2025, the administration projected that the state's General Fund (the budget's primary source of cash) had risen to $229 billion, up $10 billion from their June 2024 prediction. Despite the surprising surplus, the Governor appears to be sticking with his 2024 deal with the Legislature and will still pull $7.1 billion from the state’s main reserve account to supplement this year’s state budget.

While the predicted surplus in the budget is a positive for the state after its struggles last year, some have criticized the Governor for drawing from the reserves despite projecting a surplus. Moreover, the Governor is also facing criticisms that the projected surplus isn't genuine if money needs to be pulled from the reserves to supplement it. Nevertheless, the budget is subject to substantial changes considering the Los Angeles County fires (estimated to have incurred over $135 billion in damages) and the recent change in the federal administration. While President Biden allowed the Governor to tap into federal funding and assistance programs during his term, the state appeared to be bracing for potential decreases due to the new administration's repeated threats towards withholding federal disaster aid and prospective hard-lined stances on trade and immigration policies. The Governor appeared to indicate that he wanted to raise the state’s rainy day fund deposits from 10% of the state’s General Fund tax revenue to 20% in anticipation of any upcoming challenges California may face, given that one-third of California’s budget relies on funding from the federal government. He has also allocated $25 million for Attorney General Rob Bonta’s office to defend against any potential legal challenges from the federal administration.

In total, Governor Newsom’s budget proposal has allocated about 26.0% (amounting to approximately $59.502 billion) of the state’s General Fund expenditures towards health care. This year’s budget proposal did not indicate any major changes to the health sector, and appeared to preserve key investments in healthcare, including primary care provider rate increases and maintaining baseline funding for workforce programs. In this month’s California Legislative Beat, we’ll walk through some of the highlights pertaining to health within Governor Newsom’s new proposed budget.

Coverage Related Updates

Proposition 35 and the Managed Care Organization (MCO) Tax

With federal approval, states are allowed to impose taxes on managed care plans to reduce or offset Medicaid spending and draw down additional federal funds. The tax is charged on Medi-Cal managed care plans and private insurance plans and is meant to offset General Fund spending on Medi-Cal while supporting provider rate increases to improve access to healthcare services, as many providers currently don't accept patients with Medi-Cal insurance. Spending decisions around the MCO tax are subject to input from an advisory committee under the Department of Health Care Services (DHCS), federal waiver approval, and ongoing budget considerations.

In November 2024, Californian voters approved Proposition 35, which required California to enshrine the Managed Care Organization (MCO) Tax as a permanent fixture. Proposition 35 limits the use of MCO tax revenue, with additional restrictions starting in 2027, and instilled some changes to prior funding commitments. Specifically, provider rate increases will continue for primary care, maternal care, and non-specialty mental health services.

The MCO tax provides critical funding for Medi-Cal, which helps support low-income Californians and was designed to create long-term stability for Medi-Cal funding, while lessening the burden on the General Fund. The tax is expected to incur $3 to $8 billion annually over the next three legislative sessions, incurring a projected $19.4 billion in tax revenue. While California’s MCO tax was approved by the federal government in 2023 for three years ending in December 2026, the tax's continuance will depend upon further federal approval. Subsequently, the tax is not currently seen as a reliable source for long-term improvements to Medi-Cal since its long-term funding is uncertain.

Medi-Cal

The Governor’s budget proposal had no healthcare cuts and maintained investments in Medi-Cal that would expand the program’s access, improve coverage, and increase eligibility for new recipients. At present, Medi-Cal is expected to maintain key investments from prior years, including providing full-scope eligibility and coverage to undocumented adults. Given the potential increases in enrollment, rising pharmacy costs, and an increased MCO tax, the Governor increased the Medi-Cal allocation from $174.6 billion in 2024-25 to $188.1 billion in 2025-26. Nevertheless, support for the Medi-Cal program is expected to decrease by $2.2 billion from the General Fund due to an expectation of increased tax revenues from the MCO tax. Moreover, the DHCS has reported that enrollment in Medi-Cal has declined for most months between July 2023 and June 2024, and has indicated that there may be some more steep falls in enrollment during the 2025-26 period – particularly if there is any potential variability in federal immigration policies.

Covered California Health Care Affordability Reserves

The Covered California Health Care Affordability Reserves help support the California Premium Subsidy Program and other initiatives aimed at making health care more affordable to Californians. While $82.5 million was allocated in 2024 from the Health Care Affordability Reserves to Covered California for financial assistance programs, the funding is set to potentially increase to $165 million starting later in 2025.

Drug Assistance Programs

Prescription Drug Affordability

Governor Newsom’s administration has indicated that it will continue to evaluate the key drivers of prescription drug cost growth and will build off of the Office of Health Care Affordability and CalRx’s goals. Specifically, the budget indicates that the Governor and his team will try to increase pharmacy supply chain transparency and prescription drug affordability during the coming term.

AIDS Drug Assistance Program (ADAP) & Pre-Exposure Prophylaxis Assistance Program

The budget has also continued to allocate $8.5 million this term towards the AIDS Drug Assistance Program Special Fund to enhance the ADAP and Pre-exposure Prophylaxis (PrEP) Assistance Program. ADAP is a program that helps people with HIV by covering the cost of prescription drugs and insurance premiums, so that they are better able to access their necessary medications and health care supports. The budget seeks to reimburse Medicare Part B premiums and out-of-pocket costs while expanding employer-based health insurance premium payments for ADAP enrollees. Meanwhile, the PrEP Assistance Program allows people who are at a high risk of contracting HIV to prevent infections by providing medications and other health services.

Continued Funding for Behavioral Health Initiatives

In December 2024, the federal government approved approximately $8 billion for a new program known as Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT). The demonstration program was approved to run effective January 1, 2025, to December 31, 2029, and will include California-wide and country-wide opt-in programs to expand and strengthen behavioral health supports for Medi-Cal recipients with significant behavioral health conditions. The program will fund activities and services administered by the Department of Health Care Services (DHCS), the Department of Social Services (DSS), and the Department of Health Care Access and Information (HCAI).

The program is particularly focused on children and youth, individuals who are experiencing or at risk of experiencing homelessness, and individuals who are involved with the justice system. BH-CONNECT will provide investments relating to workforce initiatives, transitional rent, support for children and youth, county initiatives, and more. For instance, the program will support the delivery of behavioral health systems, provide short-term mental health care in in-patient and residential treatment settings, and provide transitional support for individuals who have significant behavioral health needs and are returning to the community after a long-term hospital or residential facility stay.

Other Initiatives

Diaper Initiative

Governor Newsom also budgeted $7.4 million from the General Fund for 2025-26 and $12.5 million in 2026-27 to allow the Department of Healthcare Access and Information to provide diapers to newborn babies. Under the initiative, families of newborn babies will receive three-month supplies of diapers at no cost through their hospital system. The program was put forth to improve maternal and newborn health outcomes.

Workforce Programs

Last but not least, Governor Newsom's budget maintained funding for workforce programs to keep up residency, nurse training, and other pipeline programs. The budget maintains almost $109 million for this initiative in the coming legislative year.

Next Steps in the Budget Process

As per the California Constitution, the proposed budget will next undergo legislative review. The bill will first be discussed within the subcommittees of the Senate's Budget and Fiscal Review Committee and the Assembly Budget Committee. Following this, the Legislative Analyst's Office will issue a non-partisan analysis of the budget bill, alongside their recommendations. The Department of Finance will also simultaneously provide its recommendations at this time. The budget will then be revised based on the committee discussions and will be re-released on or before mid-May. In its final step, the Legislature will pass a finalized version of the budget bill for the upcoming 2025-26 fiscal year by midnight on June 15, which will promptly go into effect in July 2025.

Keep following The Source to learn more about the ongoing developments in the California budget process.

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