In summary
Gov. Newsom and legislative leaders announce an agreement to bridge the state budget deficit by dipping into reserves and reducing some spending. The deal also calls for a bill in August to set aside more money and a 2026 constitutional amendment to grow the state’s rainy day fund.
California will make widespread cuts to state government operations, prisons, housing programs and health care workforce development in order to maintain its social safety net as it moves to close a multibillion-dollar budget deficit.
The $297.9 billion spending plan, announced this morning by Gov. Gavin Newsom, Senate President Pro Tem Mike McGuire and Assembly Speaker Robert Rivas, also relies on reserves and pauses some business tax credits to address a remaining revenue gap estimated at $56 billion over the next two years.
“This agreement sets the state on a path for long-term fiscal stability — addressing the current shortfall and strengthening budget resilience down the road,” Newsom said in a statement. “We’re making sure to preserve programs that serve millions of Californians, including key funding for education, health care, expanded behavioral health services, and combatting homelessness.”
The Legislature passed a budget more than a week ago in order to meet a statutory deadline, but it did not represent a final deal with Newsom as they continued to negotiate over whether to repurpose billions of dollars earmarked to increase payments for health care providers who treat low-income patients and whether to further delay minimum wage increases for health care workers, among other issues.
Their agreement — which the Democratic-controlled Legislature is expected to vote on through a series of bills next week ahead of the July 1 start of the new fiscal year — does claw back the funding intended for Medi-Cal provider rates. It pushes back the health care wage hikes until at least October and potentially until next year, depending on the strength of revenue collections in the coming months. Despite heavy opposition from labor unions, the move could save California hundreds of millions of dollars.
The plan makes $16 billion in cuts, including a blanket 7.95% reduction in funding for nearly all state departments and the elimination of thousands of vacant positions, which are collectively expected to save nearly $3.7 billion. The Department of Corrections and Rehabilitation will take an additional $385 million cut at the urging of progressive lawmakers, far higher than what Newsom had originally sought for the shrinking prison system.
Other major reductions include $1.1 billion from various affordable housing programs, $746 billion for health care workforce development and $500 million to build student housing. A scholarship program for middle-class college students will lose $110 million annually, about a fifth of what the governor had originally sought to cut.
More than $3 billion in previously promised funding to expand food benefits to undocumented immigrants, increase pay for providers who care for people with developmental disabilities, add new subsidized child care slots and build out broadband internet will be delayed.
This will allow the state to protect what Newsom and legislative leaders touted in their announcement as “core programs,” including an expansion of Medi-Cal, California’s health care program for the poor, to all adults regardless of their immigration status, as well as increased funding for behavioral health, welfare grants and supplemental income for seniors. Local governments will receive another $1 billion to address homelessness.
The budget deal shrinks a proposed cut to schools funding, following a tense negotiation with education groups during which teachers unions ran a television advertising campaign criticizing Newsom. About $5.5 billion will be delayed until future years.
“The Assembly fought hard to protect the public services that matter most to Californians, and we are delivering a budget that prioritizes affordability and long-term stability,” Rivas, a Salinas Democrat, said in a statement.
As part of their agreement, Newsom and the Legislature will pursue several additional measures to address the circumstances that led to California’s steep deficit. While the state experienced a historic surplus just two years ago, a delay in tax collections last year caused by winter storms shielded the extent of California’s weakening fiscal condition until after the governor and lawmakers had already committed to too much new spending.
The budget deal proposes legislation, to be taken up in August, that will require the state to set aside a portion of future projected surpluses so that it cannot be spent until the money is collected. It also suggests putting a constitutional amendment before voters in 2026 to grow California’s main reserve account.
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In the meantime, the state plans to dip into that rainy day fund, pulling out more than $12 billion over the next two years to address the fiscal shortfall. It will also suspend the net operating loss for companies with more than $1 million in taxable income and limit business tax credits to $5 million annually — strategies that it previously employed at the height of the coronavirus pandemic — to raise an estimated nearly $15 billion in new revenue over the next three years.
“Make no mistake: This is a tough budget year, but it also isn’t the budget situation we were originally fearing,” McGuire, a Healdsburg Democrat, said in a statement. “This balanced budget helps tackle some of our toughest challenges with resources to combat the homelessness crisis, investments in housing, and funding to fight wildfires and retail theft.”
