In a significant budget agreement reached late Tuesday, Governor Gavin Newsom has revised some of his original proposals for cuts to health care programs amid a challenging fiscal landscape for California.
Despite acknowledging the state’s growing deficit, the decision to limit services for undocumented immigrants, particularly in the Medi-Cal program, remains a pivotal part of the proposal as California grapples with a projected $12 billion shortfall.
The proposed $321 billion spending plan is set to be presented to the Legislature for approval before the start of the new fiscal year on July 1.
As rising health care costs and an economy hampered by tariffs take their toll, California financial officials have faced challenging conversations regarding spending priorities.
The agreement represents a compromise between Newsom’s more austere budget approach, which sought to curb recent expansions of subsidized health care, and the Legislature’s desire to avoid drastic cuts that could harm vulnerable populations.
Legislative leaders successfully argued for maintaining essential safety net services, delaying or foregoing many of the proposed cuts while still meeting constitutional deadlines.
They expressed hope that the economy would improve, allowing for more stable future revenues.
To address the immediate shortfall, the state plans to draw approximately $7 billion from its rainy-day fund and another $6.5 billion from various cash reserves as part of the budget balancing measures.
As agreed upon in the deal, starting in January, enrollment in Medi-Cal for undocumented adults will be frozen.
This decision comes in the wake of an unexpected surge in enrollment that contributed to significant cost overruns amounting to about $6 billion for the program earlier this year.
Moreover, the budget will eliminate dental coverage for those who manage to remain enrolled in Medi-Cal starting July 2026.
Additionally, a new $30 monthly premium will be instituted for undocumented Medi-Cal patients aged 19 to 59, effective July 2027.
However, the budget plan does not implement cuts to long-term care benefits, home health aide overtime pay, or reproductive health funding, marking a critical shift from Newsom’s earlier proposals.
Public transit agencies and state university systems, including the University of California and California State University, are spared from funding reductions in this budget.
Despite some budget deferrals, the agreement includes crucial support for the financially struggling Sonoma State University, with a $45 million allocation intended to address its financial challenges.
Funding for affordable housing and homelessness services has been preserved as part of the budget, with $620 million allocated for grants and loans to bolster affordable housing construction and $500 million designated for local homelessness support.
In light of the recent voter-approved Proposition 36 aimed at addressing drug crimes through treatment mandates and increased penalties, the budget adds $100 million in one-time funding to support counties in its implementation.
Governor Newsom remains opposed to this approach, arguing that it could lead California back toward mass incarceration.
The budget deal also maintains the governor’s plan to close a fifth state prison by October, which is projected to yield annual savings of about $150 million.
In a bid to encourage local film and television production, the deal more than doubles the size of California’s film and television tax credit to $750 million.
The agreement further shifts funding internally, designating $1 billion raised from greenhouse gas polluters through cap-and-trade auctions to support firefighting and vegetation management projects.
Some lawmakers voiced opposition to the diversion of funds initially intended for climate change initiatives.
Significant policy questions remain unresolved in this budget agreement, including the fate of the cap-and-trade system proposed for reauthorization and the contentious Delta tunnel project.
These issues may be addressed through follow-up budget bills in the weeks to come or through the regular legislative process by the end of summer.
Governor Newsom has yet to respond to a legislative proposal to loan up to $1.75 billion to local transit agencies in Los Angeles and the Bay Area, which are facing their own budgetary difficulties.
Factors beyond California’s control could also influence budget considerations later this year, as potential changes to federal tax legislation loom on the horizon.
State officials remain cautious about the ramifications of deep cuts to health care and food aid funding tied to these negotiations, with calls from progressive lawmakers and advocacy groups mounting for state tax increases to mitigate expected federal reductions.
While the immediate budgetary concerns may have been addressed, the long-term financial stability and health of California’s programs for its most vulnerable residents remain a pressing point of debate.
The ongoing economic challenges have set the stage for a continued examination of California’s budget priorities and funding approaches as leaders seek to navigate an uncertain fiscal future.
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