May 19 Summary of 2025-2026 State Budget May Revision for Board of Supervisors

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The Governor’s May Revision to the 2025-26 State Budget forecasts a $12B General Fund shortfall over the next year, a significant shift from the modest $343M surplus projected in January. Despite stronger-than-expected cash receipts through April, the revised budget anticipates economic slowing – a "growth recession" with projected operating deficits forecasted the next few years. Key reasons behind the worsening outlook:

• Capital gains tax revenues ↓$41B from Jan: state’s highly progressive tax system heavily relies on capital gains from high-income earners. Recent stock market dips à lower capital gains realizations
• Medi-Cal costs ↑$13B from Jan: enrollment, healthcare, and prescription drug costs are all up
• Broad macroeconomic volatility: federal tariffs and trade disruptions weigh heavy on the world’s fourth largest economy. 1 in 5 jobs in California are linked to trade.
• Adding to uncertainty in projecting revenues, the IRS deadline was extended for all filers in LA County, which represents ¼ of the state’s population, and a significant share of high-income earners.

To close the $12B shortfall next year, the May Revision relies on:

• $5B in general fund program reductions
• $5.3B in borrowing and revenue shifts (including use of Prop 35 MCO tax revenue – critiqued as not sufficiently funding provider rate increases)
• $1.7B in fund shifts (notably from General Fund to Greenhouse Gas Reduction Fund)
• $7.1B draw from Rain Day Fund reserves
• No new taxes proposed

In perspective: $12B shortfall represents 5% of the total budget, compared with last year’s deficit which was 22% of the total budget. The May Revision highlights the lingering effects of structural decisions made in previous years:

1. Prop 98 Obligations: Revenue spikes in 2022 and 2023 drove up the Prop 98 minimum K–14 education funding guarantee. Because Prop 98 uses a multi-year revenue average, those years locked in a higher baseline for school funding—meaning fewer discretionary General Fund dollars for non-education programs like those benefiting local governments.
2. Surplus Spending Controls: Last year the state adopted a safeguard against overspending future surpluses by requiring any projected surplus to be held aside until revenues are actually realized.
3. Rainy Day Fund Reform Proposal: The Governor continues to call for a constitutional amendment—slated for the 2026 ballot—to increase the Rainy Day Fund cap from 10% to 20%.

It is important to note that the May Revise does not include any of the stark federal program reductions currently being contemplated by Congress through Budget Reconciliation or FY 26 Appropriations. California receives $94B in federal Medicaid revenues alone – even a 10% reduction in those would nearly double the state’s budget problem.

Finally, California’s current Cap and Trade program – which brings in $4B in revenues annually to the state’s Greenhouse Gas Reduction Fund (GGRF) – expires in 2030, and reauthorization of the program was expected this year. Paired with the May Revise release, the Governor released his Cap and Invest proposal to reauthorize the program through 2045. Highlights from the Governor’s proposal:

• $1.5B shift from General Fund to GGRF to support CAL FIRE operations (eases pressure on GF)
• Dedicates $1B annually to high-speed rail (similar to current 25% revenue commitment)
• Cost of living: makes semi-annual utility bill rebates to consumers permanent, through 2045

Health and Human Services

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• Future of Public Health funding maintained at prior budget’s levels (8% reduction last year).
• CalAIM funding and investments maintained, including for Enhanced Care Management and Justice-Involved initiatives.
• CalFresh food assistance to undocumented residents maintained, and with October 2027 start (though original timeline was October 2025 start).
• BH-CONNECT full funding commitment of $8B/year maintained (state + federal) under Medicaid waiver to support BH workforce development and transitional rent assistance.
• CalWORKs base grant and Single Allocation preserved. Family Stabilization, and Expanded Subsidized Employment funding sustained.
• Foster care Rate Reform maintains July 2027 date, though with new funding availability trigger.
• Adult Protective Services Expansion to lower age served from 65 to 60 continues.
• CA Nutrition Incentive Program preserved, including funding for Market Match.
• 1991 & 2011 Realignment revenue growth projected, though less than January’s estimate.

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• Homelessness funding notably left out, including new HHAP or ERF round.
• Medi-Cal for undocumented (UIS) proposed to freeze enrollment in Jan 2026, new $100 monthly premium for undocumented adults, and elimination of long-term care and dental benefits. UIS is 5% of state’s total Medi-Cal budget.
• In-Home Supportive Services provider overtime/travel limits (caps) proposed.
• Behavioral Health Bridge Housing funding reduced $334M to $1B (General Fund, not Prop 1)
• Child Support Agencies total funding cut 5%, though impacts to local agencies still unknown.

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• Medi-Cal asset test limits reinstated for seniors and disabled adults, effective Jan 2026.
• Childcare slot expansion 2-year delay in last year’s budget maintained – 200,000 expansion remains paused at 130,000 new slots. COLRs for providers suspended in May Revise.
• Prop 1 implementation funding for counties maintained at $94M for next year.
• CARE Act funding to counties maintained. No new funding for SB 43, same as January Budget.
• Healthcare worker min. wage took effect Oct 2024, yet no new funding to support increases – leaving impact on hospitals, CBOs uncertain.

Climate

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• CAL FIRE operations investment sustained with $1.5B shift from GGRF for workforce expansions. Additional $28M allocated to expand aerial fleet.

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• Climate Resilience and Local Planning no new funding proposed, including for coastal adaptation.

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• Delta Conveyance Project received specific support in May Revise for fast-tracking environmental reviews and permitting. Further CEQA exemptions supported in May Revise.

Administration of Justice

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• Prop 47 savings grant funding $91.5M (higher than previous years) for behavioral health and K-12 diversion programs, though expected to decrease in later years due to Prop 36.

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• Prop 36 no new funding despite expected county workload and behavioral health treatment increases.
• Victims of Crime Act (VOCA) supplemental funding to backfill federal funding decline not included.

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• Dept of Corrections and Rehabilitation proposed to close fourth state prison by Oct 2026. San Quentin’s new education center funding maintained.
• Community Corrections Performance Incentive grant funded at $128M for Probation Departments, consistent with prior years.
• Juvenile Justice Realignment block grant funding remains flat at $209M.

Housing, Infrastructure, Technology, Education

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• Low-Income Housing Tax Credits maintained for current year $500M supplement funding, but no new funding for next year proposed.
• Statewide housing bond support signaled, though 2026 ballot proposal still with Legislature.
• Excess-ERAF reduction provision not included  (Marin receives $66M Excess ERAF countywide).

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• Housing programs no new Multifamily Housing, CalHome funding, $32M rescinded from infill.
• Broadband additional $1.5B General Fund proposed in January budget for middle mile has been eliminated. $200M last mile delayed 2 years.
• Arts funding still at risk: last year’s $5M cut to CA Arts Council maintained, but $11.5M restored to the Performing Arts Equitable Payroll is newly cut.

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• New Housing and Homelessness Agency proposed to include HCD, Cal-ICH, and housing financing in one state agency, separate from Business and Consumer Services.
• Transportation programs no new funding for major transportation programs, though continues the $1.9B promised in last year’s budget.