Governor Newsom’s May Revision to the California 2025-2026 State Budget
On May 14, Governor Newsom released the May revision to the initial 2025-2026 California budget proposal that was released in January. The May Revise proposes a total expenditure of $321.9 billion, representing a $300 million decrease from the January estimate. Despite a projected surplus in the January budget, changing national economic conditions and increased expenditure growth (especially in Medi-Cal) have resulted in a $12 billion deficit in the updated budget.
In 2024, the budget’s $45 billion deficit was anticipated to take two years to balance, but in January, following hopeful revenue reports, Governor Newsom projected a surplus. However, the new federal administration's significant rollback on funding to state programs and economic uncertainty resulting from the President's proposed tariffs and related stock market volatility is requiring careful budget refiguring on the part of state leaders to ensure access to essential programs. Estimates are that California revenues would be $16 billion higher next year if not for the new tariffs, and potential stock market declines account for a $10 billion state revenue decline. Furthermore, due to this year's wildfires, residents of Los Angeles County have been granted a six-month extension to file their taxes, which affects the state's ability to accurately predict revenue projections for the year. H.D. Palmer, a spokesperson from the Department of Finance, illuminated the extent to which the extension will impact the state, reporting that a "significant" number of returns and value come from the 25% of the state's population that resides within LA County.
Similar to preceding years, attempts to close the budget gap through program cuts and eliminations, delays, borrowing, and fund transfers are anticipated. State programs serving the state's most vulnerable populations face significant loss of funds totaling over $16 billion. In addition, the state will seek to withdraw $7.1 billion from the rainy-day fund, also known as the Budget Stabilization Account (BSA), leaving an estimated $11.2 billion for future use, which is approximately half of the amount available in the fund during the 2023-2024 budgetary year. However, the withdrawal from the BSA was already anticipated as a part of the 2024-2025 Budget Act and will continue to incur growth through the required 1.5% annual deposit from the General Fund as conditioned by Proposition 2.
Multiple program cuts and the loss of access to essential programs have led to a variety of state organization leaders and advocates expressing concern about the well-being of already underserved populations. Individuals currently undocumented may lose all long-term care and dental benefits as well. Additional cuts are anticipated in behavioral health, housing security, Early Care & Education, Foster and Disability Programs, and prison closures. Aside from these concerns, the budget revision aims to secure several programs, including Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT) and key CalWORKs initiatives.
Overall, a little over $131 billion is allocated for the Health and Human Services as part of the 2025-2026 Budget Act, a nearly $4 billion increase from the initial amount projected in January. An increased expenditure of almost $20 billion from 2024. Echoing previous years' strategies, the 2025-2026 Budget Act proposes a few solutions that experts suggest could increase revenue by raising state taxes on corporations and various industries, such as the film industry.
Medi-Cal Under Pressure: The Impact on California’s Most Vulnerable
Rollbacks for Undocumented Adults
In response to the strain put on the state by significant cutbacks of federal funding, and by the unexpected costs of the program, the May Revise proposes to place limits on healthcare coverage to the nearly 1.6 million undocumented immigrants in the state. Beginning January 1, 2026, the state will be freezing new enrollment for "full-scope state only coverage" for "otherwise eligible" undocumented adults, nineteen years and older. While the freeze would be a step back, since California is one of only fourteen states that offers health coverage to undocumented immigrants, even if new limits are imposed, the state would still be doing more than many other states to provide coverage. The Governor has cited a Medi-Cal expenditure for undocumented immigrants $2.7 billion higher than was expected as justification for the rollback. The decision comes on the heels of the United States Congress's intentions to reduce federal funding of Medicaid and to enact penalties for states that use state-only funds to provide healthcare coverage to undocumented immigrants. The proposal comes with exceptions: those those already receiving care will maintain their coverage; children under the age of 19 will still be eligible to enroll; and individuals individuals requiring pregnancy and emergency services will be eligible. While the freeze on new enrollment is set to begin January 2026, there is no word on how long the freeze will last.
Additionally, undocumented adults enrolled in Medi-Cal will be required to pay a $100-a-month premium per adult beginning January 1, 2027. Governor Newsom has defended the move, saying that the premium is in line with the average cost paid by those who are on subsidized health plans through California’s own marketplace. However, there is no premium for most people currently on Medi-Cal. While the proposed freeze and premium are estimated to save the state more than $6 billion combined over the next three years, critics, such as Assembly Speaker Robert Rivas, are not as optimistic and are prepared to negotiate. "Immigrant workers and families, who pay billions in taxes, deserve access to care, and I am proud to protect California's progress expanding Medi-Cal. . .There are tough choices ahead, and Assembly Democrats will closely examine any proposal from the Governor. But let's be clear: We will not roll over and leave our immigrants behind." The enrollment freeze and subsequent premium increase would put a multitude of California residents at risk of losing access to essential healthcare, which could ultimately result in higher costs for the state in the long run. The utilization of emergency departments and poor health outcomes are among the impacts that could result.
Systemwide Cost Shifts – Eligibility & Drug Prices
The May revision to the budget proposal would reinstate an asset test for Medi-Cal and In-Home Supportive Services applicants. The asset test had been in place in California for years but was eliminated in 2024. To pass the test, consideration of all assets, including property and other resources, would be reviewed prior to making a Medi-Cal eligibility determination for enrollees. The bar would be set at $2,000 and $3,000 for individuals and couples, respectively, with savings estimates surpassing $790 million over future budgetary years. Likewise, the May revision proposes cutting Medi-Cal Pharmacy Benefits for a variety of medications and products, ranging from GLP-1 weight loss medications (e.g., Ozempic and Wegovy) to COVID-19 tests. Additionally, the state is proposing to establish a drug rebate aggregator system in an effort to get money back from drug companies after medications have been provided to state Medi-Cal patients. While the rebate system is projected to save the state over $150 million over the next several years, such a system would substantially impact medically fragile patients who encounter high drug prices for illnesses such as HIV/AIDS and cancer by restricting access to essential treatments.
Behavioral Health Coverage
Fortunately, a number of essential behavioral health programs and initiatives are anticipated to survive the budgetary solutions proposed by means of shifting funds as approved by voters' support of Prop 1 last year. California's Mental Health Services Act will provide the state's residents with a variety of treatments such as residential facilities, veteran housing & behavioral health needs, mental health, and substance use services. The fund created by Prop 1 will also continue funding CalHOPE services, providing Californians with access to support for a range of mental health needs, such as Adverse Childhood Experiences. However, some cuts to existing programs are proposed, including the Behavioral Health Bridge Housing Program, county behavioral health services, and the Child and Youth Behavioral Health Initiative. Behavioral health advocates are concerned about what the loss of such services could mean for the 1 in 6 Californians who have a mental health disorder.
Managed Care Organization (MCO) & Provider Payment
The provider-based Managed Care Organization (MCO) tax serves as a key financing tool that allows California to draw down additional federal Medicaid funds to help support and expand Medi-Cal coverage by charging taxes on managed care and private insurance plans. In November of 2024, voters approved a substantial shift in how policymakers can utilize the revenue garnered from this tax under Proposition 35. The passage of Prop 35 preserved the MCO Tax in the state of California. Governor Newsom's opposition to the measure was well publicized as he was critical of the lack of flexibility in spending that would be tied to such a bill. While the funds were initially intended to provide a reliable source of funding for providers who care for Medi-Cal clients to bolster access to healthcare, $1.3 billion of Prop 35 money is now being diverted to cover the state’s $12 billion deficit. Health advocates throughout the state are concerned that the shift of funds could severely impact the ability of clinics to stay open – specifically targeting the type of care the proposition's money was intended for.
Furthermore, questions surrounding the legality of the fund shifting are gaining traction. Carmela Coyle, President of the California Hospital Association, remarked that the move is not only unlawful but also completely opposed to the sixty-eight percent of state citizens who voted to approve the measure. In response, Governor Newsom contends that his decision is "absolutely consistent" with the initiative, claiming $1.3 billion of the money is going towards Medi-Cal base rates. Where the money has traditionally been used to offset spending from the General Fund for Medi-Cal, the amount allocated to do so will be reduced from the $9 billion that was used last year, to only $2.8 billion by the next fiscal year. As a result, the provider payment increases that were hotly debated yet ultimately authorized by voters in 2024 have been repealed.
Pharmacy Costs Made Transparent
In response to growing prescription costs, as part of the May Revision, Governor Newsom has proposed licensure and regulation of Pharmacy Benefit Managers (PBMs). PBMs act as intermediaries that manage claims for drugs on behalf of insurers and employers. While PBMs could play a positive role by using their purchasing power to negotiate rebates and other discounts on behalf of their clients, PBMs have come under fire in recent years with claims that they inflate drug prices by retaining rebates and using spread pricing, restrict patient choice through limited formularies, and promote vertical integration between the PBMs and insurance companies.
If enacted in the final Budget Bill, the proposal will require PBMs to report all financial details, including the prices charged to health plans and those quoted to pharmacies. The regulation would enforce a fiduciary obligation to the PBM’s clients and would, for the first time, stipulate an ethical standard. The Department of Managed Health Care would be responsible for reviewing all contracts held by California PBMs as well as conducting financial audits of their records. This change would be a first and would help pull back the curtain on a sector often clouded in secrecy and darkness.
Looking Ahead
As the June 15 constitutional deadline for passing a state budget approaches, the Senate and Assembly Budget Committees will hold hearings to review the Governor's May Revision. Following these hearings, subcommittees in each house will make detailed recommendations on specific spending items, shaping each chamber's version of the Budget Bill. A joint conference committee will then reconcile any differences between the two versions before sending the final budget to Governor Newsom for approval. While additional adjustments are likely to follow after the deadline, The Source will continue to keep readers informed of key developments and major updates throughout the budget process.