In early January, Governor Newson presented his 2026-2027 proposed budget.
While the budget proposal generally maintains funding for existing services, the governor incorporated increases to offset the pending deficits that will impact the state as a result of the deep cuts imposed by federal legislation, H.R.1, signed last July.
H.R. 1 cuts roughly $800 billion from federal Medicaid spending in the next decade. With reduced federal support, the state general fund will face great pressure starting in the 2026-2027 cycle to backfill healthcare costs, inevitably pushing the state and the future governor to make tough choices on coverage, eligibility, services, and access.
The state budget proposal allocated a spending total of $343.6 billion in 2026-2027 to Health and Human Services, with Medi-Cal accounting for the largest share of spending from $196.7 billion in 2025-2026 to $222.4 billion in 2026-2027.
Another significant H.R.1 provision will disrupt California's existing Managed Care Organization (MCO) tax structure, rendering it noncompliant with federal requirements. The funds raised from this tax were intended to leverage federal matching funds earmarked for Medi-Cal. In 2023, the tax was expanded through 2026. However, in 2024, voters passed Prop 35 to make it permanent. Because California’s MCO tax raises much more from Medi-Cal enrollments than from commercial plans, the tax structure now violates the standards set in H.R. 1. This misalignment with federal statute threatens this source of revenue for the state. Once the tax structure is compliant, it will generate significantly less revenue than the original structure.
In numbers, the governor proposed a $348.9 billion budget for fiscal year 2026-2027, with $248.8 billion in General Fund expenditures and a projected reserve of $23 billion that refills the state’s “Rainy Day Fund.”
The projected deficit in the governor’s proposal is approximately $3 billion, while the estimate projected by the nonpartisan Legislative Analyst’s Office (LAO) is around $18 billion. The governor’s plan assumes much higher tax revenues due to the current boom in AI technologies and paints a much more optimistic picture.
This budget is the governor’s opening “offer.” From this point on, legislative leaders and the governor will negotiate, restructure, and recalculate. We will see a much more conclusive outlook when the governor once again issues his revised budget in May, called the “May Revise,” after which legislators will have until June 15th to vote and pass a final adoption. Until then, all these numbers can shift.
For more information:
H.R.1 Medicaid Cuts: https://www.kff.org/medicaid/which-states-might-have-to-reduce-provider…
Legislative Analyst’s Office (LAO) Budget Overview: https://lao.ca.gov/Publications/Report/5101
Health and Human Services Budget Breakdown: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://ebudget.ca.gov/2026-27/pdf/BudgetSummary/HealthandHumanServices…?
Gabriela Villanueva is CAP’s Government and External Affairs Analyst. Questions or comments related to this article should be directed to GVillanueva@CAPphysicians.com.