Democrats in the state Legislature advanced a budget deal Friday with Gov. Gavin Newsom that raises general fund spending and puts off major cuts to government programs for another year, in a $321 billion spending plan the governor is expected to sign Monday, just before the July 1 deadline.
While President Donald Trump’s administration was making life “incredibility difficult” for Californians with ICE raids, tariffs and federal spending cuts, Assembly Democrats have “delivered a budget that protects California,” Assembly Speaker Robert Rivas said in a statement.
“It cuts red tape to build more housing faster — because housing is the foundation of affordability and opportunity,” Rivas said. “It preserves critical investments in health care, women’s health, education and public safety. And it honors our commitment not to raise taxes on families, workers or small businesses.”
Republican State Sen. Roger Niello, vice chair of the senate budget and fiscal review committee, said Democrats “categorically” excluded members of his party from budget negotiations this year, and are ignoring the state’s long-term “structural deficit” with a budget agreement that doesn’t make enough cuts.
“They have said that they hope for a miracle in revenues,” Niello told Bay Area News Group, “and I’ve said that a budget that’s passed on hope is a budget that’s in trouble.”
California lawmakers overspent on a major expansion of health care coverage to immigrants living in the country without legal status, and with President Donald Trump’s tariffs, the trade-reliant state’s leaders are expecting a $12 billion budget deficit. That could climb as high as $24 billion in the years to come, according to state lawmakers.
However, the budget deal pares back the extension of Medi-Cal, the state’s version of Medicaid, to immigrants living without legal status in California. The expanded benefits were a priority for Democrats last year, when the state became one of the first in the U.S. to make all immigrants without legal status eligible for the low-income health care program.
In his proposed May budget revision, Newsom called for steeper cuts to Medi-Cal coverage for such immigrants, including a $100 monthly premium.
Those cost savings were softened in this week’s deal. Starting in 2027, most of those immigrants with coverage will be charged a $30 monthly premium. But the state will still pause new enrollment of those adult immigrants starting in 2026. And Medi-Cal will no longer cover dentist visits for those immigrants already on the public health plan.
The Legislature’s influential Latino Caucus had reportedly opposed the rollback. A spokesperson for caucus leader Sen. Lena Gonzalez did not respond to a request for comment by press time.
The budget agreement comes with a catch: it hinges on the ability of lawmakers to pass substantial reforms to the California Environmental Quality Act by Monday night — a priority for Newsom this session. Lawmakers were advancing legislation to do so on Friday, setting up a potential showdown. CEQA has paralyzed housing and infrastructure construction in the Bay Area and beyond.
Democrats who control the Legislature are balancing the budget with a combination of money transfers, reserves and deferred payments. The deal taps more than $7 billion from the state’s rainy day fund — 40% of that fund — and $6.5 billion from other reserves. It also transfers about $1.3 billion combined to the state’s general fund from the state’s key cap-and-trade climate program and a climate spending bond that voters approved last year.
With those reductions, the state will spend $228 billion from the general fund in the next year. That’s up from $212 billion in general fund spending during the current budget cycle and $223 billion the year prior, when California faced a whopping $68 billion deficit.
Housing and homelessness
After Newsom initially proposed not extending funding for a program that helps cities and counties combat homelessness — angering many local officials — he agreed to set aside $500 million toward the effort. However, that still only amounts to half the $1 billion the program received last year.
Additionally, the budget agreement keeps $620 million in loans and grants for affordable housing construction that Newsom had originally put on the chopping block.
Another negotiating point was funding for Proposition 36, a tough-on-crime ballot measure that voters overwhelmingly approved in November. Newsom opposed the measure and declined to include funding for it in his May budget proposal. But the latest agreement includes $100 million to support the new law, with money going to drug treatment and county courts. Still, some local officials maintain it’s not enough.
Climate and environment
To help fill the budget deficit, Newsom and lawmakers agreed to shift some funding from Proposition 4, a $10 billion climate bond approved by state voters in November, and from the proceeds of the state’s cap-and-trade climate auctions, to “back fill” environmental and wildfire expenses normally funded by the state’s general fund.
But the budget agreement still leaves several major environmental issues undecided, including Newsom’s plans to streamline approval for a $20 billion tunnel under the Sacramento-San Joaquin Delta to make it easier to move water from Northern California to Southern California. It’s a contentious plan. Newsom could still strike a separate deal before the end of the legislative session on Sept. 12 to speed the project, which has been proposed for decades.
The budget agreement also defers action on the cap-and-trade program, which requires factories, power plants and other large emitters of greenhouse gases to buy permits for each ton they emit. It generates $3 billion to $5 billion a year for the state and is set to expire in 2030. There is an ongoing debate in Sacramento between the administration, lawmakers and interest groups over how much of that money should fund high speed rail, forest thinning to reduce wildfires, or programs that benefit people living in urban areas, including efforts to reduce heat illness and other types of air pollution.
This week’s budget agreement does not reauthorize the cap-and-trade program and leaves many of those questions unanswered for later in the session or next year.