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California leaders reached a preliminary agreement on the state budget on Tuesday. This falls on Gov. Gavin Newsom’s request that Congress pass a proposal for housing reform.
The 11-hour negotiations on spending plans, which took effect on July 1, speak to the political challenge of overhauling years of environmental regulations to speed up home construction in Democrat-controlled states.
The party either hates more than tweaking California’s environmental quality laws, or dislikes approving a one-off exemption despite pressure from the governor and national criticism of the law that reform advocates say they have the capacity to build California.
The proposal is one of a series of policies that will advance in the coming days as part of the $321.1 billion budget, and Democrats are expected to move forward. The deal reflects Congress’ resistance to the governor’s proposed cuts to reduce the expected $12 billion deficit the previous year, citing uncertainty about the extent of the state’s financial problems.
“We are grateful for our strong partnership with Congress in reaching this budget agreement,” said Newsom spokesman Izzy Gardon. “The governor’s signature is conditional on completing legislation that cuts deficits and unleashes housing and infrastructure developments across the state.
The consensus begins to address even bigger fiscal issues that are expected in the future, including potential changes to federal government policies, after a few weeks of conversation about how to offset the deficit caused by overexpenditure in California.
The interim deal relies heavily on borrowing money, exploiting state reserves and changing funds to fill the shortfall. By slowing down and delaying many of the governor’s proposed cuts, the budget continues to learn from the immediate pain of the Capitol at the Capitol, avoiding the struggles of California’s long-term budget.
Congressional Republican leader James Gallagher (R-Yuba City), said budget transaction documents on the state’s financial issues.
“We are in this situation due to excessive spending,” Gallagher said. “We have made a long-term commitment to the Democrat-funded program, and now, as everyone has warned, money isn’t there to support them all.
Kat’s lawmakers and governor finally agree to reduce the expansion of state-sponsored healthcare to undocumented immigrants and restore the asset limit test for MEDI-CAL enrollees. However, the final deal saves less states than the newspaper originally proposed.
The plan restores adjustments to the cost of living for childcare workers, the governor wanted a nix, and rejects calls for overtime hours for home caregivers.
Congressional Democrats have managed to provide an additional $500 million in funding for housing, assistance and prevention grants for the homeless. The governor originally resisted giving more money to the county. He accused him of failing to show billions of dollars in state funds received to reduce homelessness.
Congressional Budget Chair Jesse Gabriel (D. Encino) pushed back the notion that Congress was not doing “real belt tightening.” He said lawmakers are trying to balance compassion and financial responsibility before dramatically cutting down the safety net programs Californians rely on.
“It’s the balance we’re trying to attack here with this budget of being responsible, and we understand that there’s a pretty high delta uncertainty for many reasons, not only focusing on the work that needs to be done regardless,” Gabriel said.
The budget also holds Newsom’s plan to provide $750 million to expand California Film and Television Tax Credit, a proposal supported by unions representing California film studios and industry workers.
The interim agreement is expected to serve as a precursor to a more challenging financial debate on additional cuts in the coming months.
California expects to lose federal funding from the Trump administration, and state officials are projecting a potentially large funding dilemma for 2026-27.
There are several key elements of budget transactions detailed in the contract and legislation summary.
Housing warning
Colloquially, it is described as a “poison” inserted into the budget bill, so the agreement between Congress and the newspaper community becomes law only if the lawmaker sends the governor a version of the proposal originally introduced by Sen. Scott Wiener (D-San Francisco).
Wiener’s bill is expected to reduce the number of building projects that require a full environmental review under the CEQA and make the process of developing environmental impact reports more efficient.
In combination with another proposal that will exempt more urban housing developments from CEQA, the act could represent a major shift in state policies that will make it easier to build.
Newsom effectively enforces Wiener’s proposal by refusing to sign budget agreements without CEQA exemption. The proposal was still drafted Tuesday evening.
The governor declared a noble goal to build more homes on the 2018 Governor Campaign Trail, but he was unable to spur construction sufficient to meet housing demand and make the home more affordable.
New York Times columnist Ezra Klein effectively summoned the inaction in California caused by the state’s marquee environmental laws and a lack of political will. His recent book, Abundance, has reconsidered his approach to governors and other Democrats, and pressured him to seek more revisions this year.
The CEQA reform bill must be passed by Monday under the budget contract. This omits another Newsom call to streamline the delta tunnel project.
Med-Cal Funding Changes
MEDI-CAL cost overruns are causing major problems with California’s budget. This challenge stems from a higher than expected price tag to expand to healthcare for all state-sponsored healthcare, unqualified and undocumented immigrants and other enrolled individuals.
Newsom’s budget proposal in May suggested substantial trim of a healthcare program for undocumented people. His plans include a freeze on new registrations as of January 1, requiring all adults to pay a premium of $100 per month, eliminating long-term care benefits and reducing full dental coverage. This change provided small savings over the next year, but saved billions of dollars in the future.
Lawmakers ultimately agreed to require undocumented immigrant adults ages 19 to 59 to pay a monthly premium of $30 starting in July 2027.
Democrats agreed to cut full dental coverage for undocumented adult immigrants, but delayed the change until July 1, 2026.
State leaders agreed to restore a much higher limit than the governor originally proposed on assets owned by Medi-Cal beneficiaries and still likely to be compensated. The new limit will be $130,000 for individuals and $195,00 for couples compared to previous limits of thousands.
They also adopted Newsom’s proposal to withdraw the benefits of Medi-cal, a specialized weight loss drug.
Moving money
The negotiations resulted in lower general fund spending than Congress proposed at the Newsom budget revision counter in May, down from $232 billion to an estimated $228 billion between 2025 and 2026.
Officials are using more money from California’s Cap-and-Trade program. This will set limits on businesses’ greenhouse gas emissions and will allow pollution units to be purchased from states, including $1 billion next year. They also use $300 million from climate change bonds rather than the general fund to pay for the environmental program.
Lawmakers and the governor agreed to delay the $3.4 billion payments on the loan to cover Medi-Cal’s cost overruns and increase another $1 billion next year.
The plan continues its agreement to receive $7.1 billion from the state’s rainy day fund to cover the deficit and join another $6.5 billion from other cash reserves to balance the budget.
Trump’s uncertainty
For months, California leaders have warned about the so-called Trump impact on the state budget.
UCLA’s financial analysts predict that Trump’s tariff policies and immigration attacks on construction, hospitality, agriculture and other key sectors are expected to slow the state’s economy in the coming months.
Meanwhile, the state has warned that federal funding cuts to California could require lawmakers to adopt additional budget cuts in August or September in the fall of next year.
According to a congressional overview of budget contracts, state officials expect future deficit estimates to range from $1.7 billion to $24 billion per year.
More coming
The final budget agreement is published in Bits and Pieces this week through a series of trailer invoices that appear online at random times.
Lawmakers pass a major budget bill on Friday, and are expected to approve additional laws by Monday before the July 1 deadline, when the budget comes into effect. Several laws, such as the CEQA housing exemption, will not be printed until the weekend.
Other decisions, such as reapproval of California’s cap-and-trade program, will be considered later in the year outside of the budget process.
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