Governor Newsom's May Revision Budget

Governor Gavin Newsom released his May Revision proposal for the 2025-26 California state budget on May 14, 2025, outlining a $321.9 billion spending plan that addresses a significant budget shortfall while maintaining essential services. This revised budget reveals the complex fiscal challenges facing California's economy and highlights the administration's priorities amid economic uncertainty.

Budget Overview and Fiscal Challenges

The May Revision projects a $12 billion budget deficit, a substantial change from January's "essentially balanced" proposal. This shortfall exists in addition to $27.3 billion in fiscal remedies that lawmakers and the governor had already agreed to implement for 2025-26, bringing the overall shortfall to approximately $39 billion. Despite these challenges, the budget maintains a $1.5 billion positive balance in the Special Fund for Economic Uncertainties and $10.9 billion in the Budget Stabilization Account (rainy day fund)

The revised budget includes $228.9 billion in General Fund expenditures, a slight decrease from the $232.1 billion revised level for the 2024-25 fiscal year. This represents the third consecutive year California has faced budget deficits requiring reductions to state programs.

Economic Factors Driving the Deficit

Governor Newsom has attributed the budget challenges to what he calls a "Trump Slump" - citing federal tariff policies, market volatility, and declining international tourism as factors that have directly impacted state revenues. During his presentation, Newsom emphasized that "California is under assault" due to what he characterized as "reckless" federal policies..

"California's economy was thriving," Newsom stated during his presentation, noting a revenue increase of $7.9 billion before conditions "changed dramatically due to the actions of this administration". The administration has estimated that these factors have resulted in a $16 billion hit to state revenues..

Key Budget Priorities and Investments

Despite fiscal constraints, Newsom's revised budget maintains several key investments:

Education

The budget fully funds universal transitional kindergarten for all four-year-olds in California. Additionally, it preserves free school meals for all students and expands before-school, after-school, and summer programming. The budget allocates $545 million for literacy programs with a focus on supporting multilingual learners.

For K-12 education, the May Revision reflects a 2.43 percent cost-of-living adjustment for the Local Control Funding Formula, which combined with growth adjustments, provides $2.5 billion in additional discretionary funds for local educational agencies..

Housing and Infrastructure

The governor has proposed a legislative package to streamline housing development by reducing bureaucratic hurdles, aligning permitting timelines, and expediting approvals. The plan includes streamlining Coastal Commission approvals to match other permitting agencies' timelines and prioritizes infill and transit-oriented development.

Additionally, the budget includes a significant push to fast-track the $20 billion Delta Conveyance Project, a 45-mile-long water tunnel designed to deliver more water from the Sacramento-San Joaquin River Delta to farms and cities throughout the state. Newsom wants legislation to simplify permitting, confirm bond-issuing authority, and prevent "unnecessary litigation delays"..

Climate Initiatives

A notable addition to Newsom's May Revision is a proposed 15-year extension of California's "cap-and-trade" emissions reduction program, which is currently set to expire in 2030. The program has generated nearly $33 billion in statewide investments and has reduced carbon emissions equivalent to removing 1.3 million gasoline-powered vehicles from the roads. The extension would ensure the continuation of the California Climate Credit initiative, offering approximately $60 billion in utility bill credits to residents over an additional 15 years.

Healthcare and Prescription Drugs

To address rising medication costs, Newsom has introduced a plan to regulate pharmacy benefit managers (PBMs), which will require them to be licensed through California's Department of Managed Health Care and report operational and financial details, including drug pricing data.. The plan also expands CalRx's authority to procure brand-name drugs, giving the state more options to counter supply chain disruptions or politically motivated restrictions on essential medications, including abortion drugs.

Budget Reductions and Adjustments

The revised budget includes several significant cuts to address the deficit:

Healthcare Coverage Adjustments

One of the most notable changes is a proposal to freeze enrollment for undocumented adults in the state's Medicaid program (Medi-Cal) starting in 2026. While those already enrolled won't lose coverage, new applicants aged 19 and older would be unable to join the program. Additionally, beginning in 2027, adults with "unsatisfactory immigration status" on Medi-Cal would be required to pay a $100 monthly premium. These changes are expected to save the state $5.4 billion by 2028-29.

Higher Education

The California State University system will face a proposed $143.8 million reduction to its General Fund instead of the initially proposed $375.2 million cut. This 3% reduction is lower than the "best-case scenario" of a 4% cut that university officials had anticipated. According to the budget summary, the CSU serves approximately 454,000 undergraduate and graduate students across 23 campuses and awarded more than 125,000 degrees in 2023-2024.

Additional Reductions

The budget also proposes cutting back Medi-Cal benefits for expensive weight loss treatments and reducing overtime hours for in-home supportive service workers. The natural resources sector, K-12 education, and environmental protection programs also face spending reductions.

Reactions and Analysis

The California Chamber of Commerce and the California Manufacturers & Technology Association have welcomed Newsom's proposed extension of the cap-and-trade program, stating it represents "a prudent approach that maintains a focus on affordability for Californians while materially reducing emissions". Jennifer Barrera, CalChamber President & CEO, noted that "economic growth and climate action can advance together".

Conclusion

Governor Newsom's revised 2025-26 budget represents a complex balancing act between addressing fiscal challenges and maintaining investments in key priorities like education, housing, climate initiatives, and healthcare. While making difficult cuts in some areas, the budget aims to protect core services while positioning California to address long-term challenges in water management, housing development, and climate change.

As Newsom concluded in his budget presentation, "We are not victims; we are not bystanders. We hold the power to shape our future". The budget now moves to the Legislature for consideration, with final negotiations expected in the coming weeks.

Details on Budget Changes

Healthcare Access and Medi-Cal Restructuring

1. Medi-Cal Enrollment Freeze for Undocumented Adults

The budget imposes a freeze on new enrollments for low-income undocumented adults in Medi-Cal starting in 2026, while allowing current enrollees to retain coverage. This measure aims to curb rising costs, as the program’s expenses exceeded projections by $2.7 billion. By 2027, undocumented adults remaining on Medi-Cal will face a $100 monthly premium, aligning with costs for subsidized marketplace plans. These changes are projected to save $5.4 billion by 2028–29 but have drawn criticism for undermining California’s commitment to universal healthcare access.

2. Diversion of Voter-Approved Healthcare Funds

Propositions 35 (2024) and 56 (2016), which allocated dedicated funding for Medi-Cal provider rates and reproductive healthcare, will see $1.7 billion redirected to offset general fund shortfalls. The California Medical Association condemns this as a violation of voter intent, warning it will exacerbate provider shortages and limit access for 15 million Medi-Cal recipients.

3. Reductions to In-Home Supportive Services (IHSS)

Undocumented individuals previously excluded from Medi-Cal will lose access to IHSS, which provides in-home care for seniors and people with disabilities. This cut, totaling $94.7 million, risks increasing hospitalizations and nursing home placements among vulnerable populations.

Higher Education Adjustments

1. California State University (CSU) System Cuts

The CSU system faces a $143.8 million reduction (3% of its general fund), down from the initially proposed $375.2 million. While mitigated, this cut delays a planned $252.3 million investment in campus infrastructure and faculty hiring until 2027–28.. San Francisco State University President Lynn Mahoney noted that mandatory cost increases, such as healthcare and pensions, will force campuses to reduce course offerings and staff.

2. University of California (UC) Reductions

The UC system absorbs a 3% ($129.7 million) cut to its base funding, impacting research grants and student services. Additionally, $31 million is deferred for replacing nonresident students with California residents at three campuses.

3. Middle Class Scholarship Program

Ongoing funding for this scholarship, which aids families earning up to $217,000 annually, is reduced by $110 million starting in 2025–26. This could increase student debt burdens amid rising tuition costs.

Social Services and Safety Net Reductions

1. Child Care and Early Education

• Child Care Slot Expansion Paused: A planned expansion of 200,000 subsidized child care slots is indefinitely paused, limiting availability to 119,000 slots and saving $489 million in 2024–25.

• Emergency Child Care Bridge Program: Funding for foster children’s childcare is slashed by 40% ($34.8 million), reducing support for 4,000 families.

• CalWORKs Home Visiting Program: A $47.1 million cut eliminates home visits for 15,000 low-income families, which aimed to improve child development and parental job readiness.

2. California Food Assistance Program (CFAP)

Planned expansions to CFAP, which provides food aid to undocumented seniors, are delayed until 2027–28, saving $117 million annually. Advocates warn this will deepen food insecurity among California’s 1.2 million undocumented elderly residents.

3. Foster Care Tiered Rate Structure

A $339 million cut delays implementation of tiered foster care payments designed to better support children with complex needs, such as trauma counseling and educational services.

Environmental and Housing Programs

1. Cap-and-Trade Revenue Shifts

$1.5 billion in cap-and-trade auction proceeds, originally earmarked for clean transportation and affordable housing near transit, will instead fund CAL FIRE’s wildfire response operations. While the administration argues this maintains critical firefighting capacity, environmental groups criticize the diversion as undermining climate goals.

2. Affordable Housing Investments

The budget reduces affordable housing funding by $1.1 billion, including cuts to the California Housing Finance Agency’s low-income construction loans. This comes amid a statewide shortage of 1.2 million affordable homes..

State Operations and Public Health

1. Across-the-Board Reductions

All state agencies face a 7.95% operational cut, saving $2.17 billion through hiring freezes, reduced contracting, and facility closures. The Department of Public Health loses $15.9 million, impacting infectious disease monitoring and health equity initiatives.

2. Public Health Grant Cancellations

Federal cuts to CDC and SAMHSA grants, totaling $12 billion, force California to scale back pandemic preparedness, mental health services, and opioid crisis response. Los Angeles County alone loses $180 million for overdose prevention programs.

Conclusion

The $12 billion deficit has necessitated difficult trade-offs, particularly in healthcare, education, and social services. While the administration emphasizes preserving core services, advocates argue the cuts disproportionately affect vulnerable populations, including undocumented residents, low-income families, and public university students. The long-term implications-such as increased healthcare costs from delayed treatments or reduced workforce readiness due to education cuts-remain a critical concern. As legislators negotiate final terms, balancing fiscal stability with equity will dominate debates.

More Information

[PDF] 2025-26 May Revision Budget Summary V2 https://ebudget.ca.gov/FullBudgetSummary.pdf

Revised on May 14, 2025 - California Budget https://ebudget.ca.gov/budget/2025-26MR/

https://stocktonia.org/news/politics/2025/05/14/california-budget-announcement-gavin-newsom/

https://www.politico.com/news/2025/05/14/newsom-asks-lawmakers-to-fast-track-delta-tunnel-project-00347599

https://calmatters.org/health/2025/05/newsom-freeze-medi-cal-undocumented-immigrants/