In January of 2025, Governor Newsom proposed a $322.3 billion budget that, based on temporary financial maneuvering and optimistic revenue projections, did not include a deficit. However, by May—after releasing revised budget figures and following the announcement of new tariff policies by the Trump administration—the state projected a deficit between $12 billion and $16 billion.
Rejecting many of the cuts Governor Newsom initially proposed, legislators passed a bicameral bill signed by the governor on June 27th with additional trailer bills expected throughout the summer to finalize all funding requirements. The result is a $321 billion spending plan that increases general fund expenditures and delays major cuts to state programs for another year.
In final budget negotiations, lawmakers relied heavily on a mix of internal borrowing, fund transfers, reserves, and deferred payments to avoid deep cuts and close the deficit. This included drawing $7 billion from the state’s rainy-day fund and $6.5 billion from other reserve accounts. Additionally, about $1.3 billion was shifted into the general fund from two climate-related sources: the cap-and-trade program and a voter-approved climate bond from the previous year.
A major policy focus in both the state and federal budget spending has been funding healthcare coverage for low-income individuals. Over the past several years, Governor Newsom made it a budget priority to expand coverage to more sectors of the population regardless of legal status. The expansion proved extremely popular with enrollments to Medi-Cal climbing higher than expected and therefore overextending the allocated state funds. In his May revision, Governor Newsom called for steep cuts to Medi-Cal coverage for immigrants with no legal status, including a $100 monthly premium. Many Latino Caucus legislators opposed the rollbacks, but an agreement was reached that includes a pause of new enrollment of those adult immigrants starting in 2026, while those with coverage will be charged a $30 monthly premium starting in 2027. Medi-Cal will no longer cover dentist visits for those immigrants already on the public health plan.
California’s state budget includes more than $170 billion in federal funds, or over one-third (34.6%) of the total state budget. Of this amount, $121.1 billion is budgeted for Medi-Cal, California’s Medicaid program. Following the passage of the federal budget reconciliation bill by Congress on July 3rd, California is expected to face significant cuts to federal funding. These cuts will trigger a ripple effect throughout the state, impacting county, city, and local budgets, and will place California in an even more precarious position as it struggles to cover the resulting shortfalls. A major concern is the shift of substantial social safety net costs—such as Medi-Cal—from the federal government to the state. As a result, the governor and legislators will face increased pressure on future budgets and will be forced to choose between backfilling the lost federal funds or making cuts to essential services.
Gabriela Villanueva is CAP’s Government and External Affairs Analyst. Questions or comments related to this article should be directed to GVillanueva@CAPphysicians.com.