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By: @Ophelia Szigeti

Governor Gavin Newsom opened his press conference releasing his May Revision to the 2025-2026 State Budget by spotlighting California’s continued economic strength, such as its gross state product of $4.1 trillion. He then pivoted to acknowledge the state nonetheless faces a $12 billion revenue shortfall driven by multiple factors, including delayed tax payments due to the Los Angeles County wildfires in January 2025, economic uncertainty tied to federal policy shifts and international trade tariffs, rising Medi-Cal expenditures, and the ongoing housing affordability crisis.

According to the non-partisan Legislative Analyst’s Office, “Overall, our assessment of the state’s budget condition for 2025‑26 is very similar to that of the administration’s assessment—namely, since January, when the budget was roughly balanced, a budget problem has emerged. We estimate the administration solved a $14 billion budget problem (similar to the $12 billion budget problem cited by the Governor). This budget problem is driven by two key factors: higher baseline spending, most notably in Medi‑Cal, and lower revenues, reflecting diminished expectations for both the personal income tax and the corporation tax.”

MEDI-CAL COSTS: A Central Budget Pressure Point

The May Revision reflects a $1.9 billion net increase in Medi-Cal spending for 2024-25 compared to the January budget proposal. This increase is primarily covered through a Medi-Cal Provider Interim Payment Loan and adds to the previously assumed $2.8 billion early General Fund allocation.

Key drivers of this increase include:

• Higher enrollment due to extended eligibility flexibility.
• The expansion of full-scope Medi-Cal to income-eligible individuals regardless of immigration status.
• Adjustments in managed care and pharmacy costs.

Looking ahead, Medi-Cal General Fund expenditures are projected to reach $44.6 billion in 2025-26, a $7.2 billion year-over-year increase, due to reduced Managed Care Organization (MCO) tax revenue and sustained cost pressures.

Without cost containment measures, the Governor’s administration estimates Medi-Cal spending will grow by approximately $10 billion over two years, contributing to long-term structural deficits.

CLOSING THE GAP: Tackling the $12 Billion Shortfall

To address the state’s projected $12 billion State Budget deficit, the Governor’s May Revision proposes a combination of targeted reductions, fund shifts, and borrowing.

Key Budget Balancing Measures Include:

• $5 billion in General Fund reductions in 2025-26, escalating to $14.8 billion by 2028-29.
• $5.3 billion in borrowing and revenue shifts.
• $1.7 billion in fund reallocations, including a 2025-2026 $1.5 billion shift from Cap-and-Trade Greenhouse Gas Reduction Funds, ongoing, to support CAL FIRE operations.
• Withdrawing $7.1 billion from the state’s Budget Stabilization Account (BSA), also known as the rainy-day fund, in 2025–26.

Select Health-Related Reductions Include:

• Freezing new enrollment for full-scope Medi-Cal coverage for undocumented adults 19+ ($86.5 million in 2025-26; $3.3 billion by 2028-29).
• Implementing Medi-Cal premiums for certain populations ($30 million implementation cost in 2025-26; $2.1 billion by 2028-29).
• Reinstating asset tests for Medi-Cal eligibility ($68.6 million in 2025-26; $765.2 million by 2028-29).
• Eliminating long-term care coverage for some adult populations ($333.3 million in 2025-26).
• Ending incentives for Skilled Nursing Facility staffing and backup power mandates ($168.2 million).

HOUSING & HOMELESSNESS: Streamlining for Impact

Governor Newsom’s May Revision also outlines a reorganization aimed at making California’s housing and homelessness response more efficient and integrated.

The proposal includes the creation of the California Housing and Homelessness Agency (CHHA)—a centralized body to lead policy development, coordinate funding, and ensure accountability in housing and homelessness programs.

CHHA will oversee:

• Department of Housing and Community Development (HCD)
• California Interagency Council on Homelessness (Cal-ICH)
• California Housing Finance Agency (CalHFA)
• Civil Rights Department
• The newly created Housing Development and Finance Committee (HDFC)

LOOKING AHEAD: Legislative Priorities and Collaboration

Governor Newsom emphasized a commitment to working with the State Legislature on proposals that expedite infill housing development and improve permitting accountability. Future efforts will focus on:

• Streamlining permitting timelines.
• Supporting transit-oriented, affordable housing to reduce vehicle miles traveled.
• Promoting innovative financing strategies to support sustainable growth.

The Governor has proposed to extend the state’s Cap-and-Trade program from 2030 until 2045, and to rename the program Cap-and-Invest: “[to reflect] the program’s mission: a stable and predictable price on carbon pollution to drive deeper investments in carbon reduction and clean technologies.”

The Governor also expressed support for two California Environmental Quality Act (CEQA) reform measures pending in the Legislature, Assembly Bill 609 (Wicks) and Senate Bill 607 (Wiener). The Governor proposed to incorporate measures into the State Budget that he says will accelerate infill and economic development. The Governor is also seeking to align Coastal Commission permitting timelines to those that apply to other agencies, and promote infill, transit-oriented development, and economic development. Additional information can be viewed here: GO Fact sheet - Housing Proposal 2025.

Delta Conveyance Project Fast-Track

Governor Newsom also announced, as part of his May Revise, a significant proposal to streamline the Delta Conveyance Project (DCP). This infrastructure project is at the heart of the State Water Project, which captures, moves, and stores water used by 27 million people and 750,000 acres of farmland.

The Governor’s proposal would streamline the project by:

• Simplifying permitting. The proposal would simplify permitting for the project by eliminating certain deadlines from existing State Water Project water rights permits. The proposal would also strengthen enforcement of the Water Board’s existing rules for permit protests.
• Confirming funding authority. The proposal confirms that the Department of Water Resources has the authority to issue bonds for the cost of the DCP, to be repaid by participating public water agencies.
• Preventing litigation delays. The proposal narrows and streamlines judicial review of future challenges to the Delta Conveyance Project, building on models used on other large public works projects. 
• Supporting construction. The proposal streamlines the authority to acquire land, supporting ultimate construction of the Delta Conveyance Project.

Governor Newsom first announced his commitment to the DCP during his first State of the State, modernizing the previous administration’s plans to address seismic and reliability issues and ensure that this critical piece of infrastructure could be built quickly and without delay.

The Governor has advanced efforts to move the DCP forward, including certifying a final environmental impact report in December 2023 and securing financial support from water agencies throughout the state serving a majority of Californians. And while the project has received some necessary permits, its path forward has faced complicated regulatory frameworks and delays. 

Stay Informed

CSDA will continue to monitor and report on key developments related to the Governor’s May Revision and its impact on special districts. To view the May Revision budget summary in detail, visit the Department of Finance website.