California Governor Gavin Newsom released his "May Revise" budget Wednesday, which takes into account actual state revenues collected through April and updated economic forecasts.
This year's May Revise was headlined by new revenue estimates that show a $16 billion reduction in expected revenue for the 2025–26 fiscal year—despite strong personal income tax and corporation tax receipts through April that were $6.8 billion above the Governor's Budget forecast in January.
The Governor asserts that the updated shortfall is largely due to two factors. The first factor Gov. Newsom noted was a "Trump Slump"—a decline in economic activity in California after President Donald Trump announced his tariff policies that have heavily impacted trade and the overall stock market. Of the $16 billion projected shortfall, $10 billion is attributed to reduced revenue from capital gains taxes. California's annual revenues are reliant on capital gains taxes, which have ranged from a low of $2.3 billion in 2009 to a record-setting $25 billion in 2021.
The second factor is increased Medi-Cal costs, including extending Medi-Cal eligibility to California's undocumented population. To control the growing costs in the program, the Administration is proposing changes to Medi-Cal's coverage by freezing new undocumented applicants over 19 years old and a $100 monthly premium for currently enrolled undocumented adults. The costs to cover California's undocumented population have drawn intense scrutiny in recent months, as the original estimates that the extension would cost the state $6 billion a year have jumped to around $10 billion. It is also notable that the May Revision does not account for the threatened federal budget cuts to Medicaid that are currently under consideration in Congress.
Overall, the Governor proposes to balance the state budget primarily through a combination of major cuts and internal borrowing. The plan would eliminate more than $5 billion in funding for various state health and human services programs, notably rescinding previous voter-enacted rate reimbursements paid to some Medi-Cal providers, including dentists, women's healthcare, and family planning clinics as well as reducing other benefits and coverage provided by Medi-Cal. The other major element in the budget proposal calls for $5.3 billion in internal borrowing which will draw down state cash reserves, including shifting some recently enacted Proposition 35 managed care organization tax funds to support higher rate reimbursements for some care providers, and $1.7 billion in other fund shifts.
In addition, the Governor and Legislature previously agreed to use $7.1 billion of the state's rainy-day fund to help offset the revenue shortfall, leaving a balance of approximately $15.7 billion in the state's reserve funds.
The Administration highlighted several other proposals as part of the May Revise, including:
- The Governor announced a proposal to streamline the Delta Conveyance Project. The proposal includes streamlining permitting, land acquisition and judicial review and providing the Department of Water Resources the authority to issue bonds for the cost of the project to be repaid by participating public water agencies.
- As part of the May Revise, the Administration seeks to lower drug prices by adding new oversight to Pharmacy Benefit Managers by the Department of Managed Health Care and Department of Health Care Access and Information. Additionally, the Administration is proposing the expansion of CalRx (the state-run initiative aimed at prescription drug affordability) to purchase brand-labeled drugs that will enable an affordable supply of both generic and brand-name drugs, maintain uninterrupted access to medications at risk of shortage or political interference and protect reproductive health care options, including mifepristone.
- The Governor and Legislature also recently announced their intention to extend the state's Cap-and-Trade program, currently set to expire in 2030. The May Revision proposes the extension and a renaming of the program to the Cap-and-Invest program. The Administration intends to work with the Legislature to design an expenditure plan that invests the program's proceeds in "transformative climate projects," including spending at least $1 billion annually for the state's High-Speed Rail Project.
Both houses of the Legislature will begin public hearings on the Governor's May Revise this month and the Senate and Assembly are expected to arrive at a joint proposal before negotiations between legislative leaders and the Governor ahead of the Legislature's June 15 deadline to pass the budget.
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