Governor proposes cuts to reduce large projected deficits
Medi-Cal and IHSS cuts are the focus of Governor Newsom's 7th May Revision
This post has been updated on May 14 and May 15 with links to key May Revision detail documents, such as the administration’s May Revision summary here, as well as edited text below concerning future federal budget challenges and the administration’s cap and trade proposal. Minor number edits have been added.
Other May Revision Documents
May Revision summary and department details here
Administration multiyear budget forecast here (assumes adoption of all May Revision proposals)
Governor’s press conference and press release
May Revision Finance Letters (detailed proposals) here
Trailer Bill Proposals, to be updated in coming days here
Assembly Budget Committee summary here
Senate Budget and Fiscal Review Committee summary here
File notices for upcoming Senate and Assembly budget hearings
My initial summary of the Governor’s May Revision proposals follows.
Trump Chaos Hurts Economy and State Budget Projections
Governor Newsom’s seventh May budget revision lowers state revenue projections through fiscal year 2025-26 by about $16 billion—relative to what General Fund revenues might have been—due to chaotic decisions by the Trump Administration (tacitly or openly supported by the Republican congressional majority) to impose broad tariffs and degrade the U.S.’s economic leadership worldwide.
Even after the Trump Administration’s recent decision to concede to China temporarily on some tariffs, the overall average tariff rate to be paid by U.S. consumers and businesses remains at 17.8%, according to the Yale Budget Lab. This is reported as the highest such U.S. tariff level since 1934. These unilateral presidential actions—now being challenged in court—amount to one of the largest tax increases in world history. These and other measures represent a bizarre series of actions seemingly intended to weaken U.S. employers and dollar assets, introducing massive uncertainty into parts of the economy that had been working reasonably well previously.
The Trump tariff taxes significantly alter the Newsom Administration’s economic forecast. In the May Revision, the forecast anticipates a U.S. “growth recession,” a period of below-trend growth along with rising unemployment. Compared to the January budget proposal from the Governor, the May Revision anticipates $10.5 billion less in General Fund revenue in 2025-26, offset by $5.8 billion more in revenue across 2023-24 and 2024-25 due to the strength of the economy before Trump and congressional Republicans took power this year.
The Newsom Administration notes that the May Revision is far from a worst-case scenario. If the “growth recession” morphed into a mild recession, state tax revenues in 2025-26 might be around $14 billion below the May Revision forecast in one scenario. Conversely, stronger economic performance is always possible, especially if anticipated tax cuts, deregulation, and reduced labor costs due to use of so-called “artificial intelligence” platforms cause the stock market to resume its pre-tariff growth trend.
May Revision Proposals: Balance 2025-26 Budget and Reduce Future Deficits
The Newsom Administration projects the Governor’s May Revision proposals close what otherwise would be an approximately $7.4 billion deficit in the state’s basic General Fund reserve, the Special Fund for Economic Uncertainties (SFEU), at the end of 2025-26. The May Revision also proposes $4.5 billion in additional savings sufficient to build the SFEU to a projected $4.5 billion balance over the next year—a prudent action, but more than the $0 SFEU balance required to balance the budget pursuant to constitutional rules. Accordingly, the administration now identifies the total amount of corrective budget proposals in the May Revision at about $11.9 billion ($7.4 billion plus $4.5 billion, as described above). (Typically, the Legislative Analyst’s Office will use its recently revised tax revenue projections and today’s May Revision cost information to provide its own deficit estimate in the coming days, which will differ from that of the administration. Enacted budgets typically rely on the administration’s revenue estimates.)
In addition to its $11.9 billion of corrective budget proposals, the May Revision continues to propose drawing down $7.1 billion in 2025-26 from the state’s main rainy day fund, the Budget Stabilization Account (BSA)—essentially the same BSA plan agreed in the June 2024 state budget package and proposed in the Governor’s January 2025 budget plan. After the proposed $7.1 billion BSA withdrawal, the BSA balance would remain at a projected $11.2 billion, approximately one-half of the BSA’s balance at the end of 2023-24. Total General Fund reserves under the Governor’s May Revision are projected at $15.7 billion in 2025-26, including the BSA and SFEU balances.
For 2025-26, the May Revision proposes $321.9 billion of state spending, including $226.4 billion from the General Fund. (The January budget proposal included $322.3 billion of state spending, including $228.9 billion from the General Fund.)
The projected deficit for 2025-26, as addressed in the May Revision, results from both the economic weakness described above and some increases in projected state spending. Expenditures in the Medi-Cal program, the state’s health care program for low-income people, have increased significantly, resulting in a $3.4 billion cash flow loan to the program and an additional $2.8 billion General Fund appropriation in recent weeks.
The May Revision summary notes that significant contributing factors to recent years’ Medi-Cal cost growth “are the COVID-19 continuous coverage requirement and the implementation of major policy changes such as the full elimination of the asset test for older adults and the full-scope expansion to all income-eligible Californians, regardless of immigration status.” Without the May Revision’s proposals to trim cost growth, the administration estimates that Medi-Cal costs would be roughly $10 billion higher across 2024-25 and 2025-26 and contribute significantly to future structural budget deficits.
The administration’s updated May Revision multiyear forecast anticipates annual General Fund operating deficits of $14 billion in 2026-27, $19 billion in 2027-28, and $13 billion in 2028-29, assuming legislative approval of all of the Governor’s May Revision cost cutting proposals. Accordingly, if none of the Governor’s May Revision proposals were adopted, future annual deficits would reach more than $30 billion by 2027-28. The multiyear forecast assumes that revenues from the three largest General Fund taxes (personal income, corporation, and sales and use taxes) drop from $201 billion in 2024-25 to $196 billion in 2025-26 before growing again to $202 billion in 2026-27, $214 billion in 2027-28, and $227 billion in 2028-29.
The forecast does not—and could not—take account of still-developing Republican congressional proposals to cut taxes, principally for high-income taxpayers, and slash funding for key programs, such as Medicaid. Those federal proposals will emerge in the coming weeks and months. Additional corrective state budget action may well be necessary after congressional action.
Key Categories of May Revision Proposals
The May Revision includes $11.9 billion of corrective budget actions to prevent a General Fund deficit in 2025-26. These corrective budget actions grow in value thereafter, helping to reduce what otherwise might be an over $30 billion annual operating deficit by 2027-28. The May Revision includes the following categories of budget-balancing actions, as reported by the Newsom Administration:
Cost Reductions, Principally Affecting Medi-Cal and In Home Supportive Services (IHSS) ($5 billion in 2025-26). The Governor proposes an enrollment freeze for individuals aged 19 and older with so-called “unsatisfactory immigration status” (UIS) in Medi-Cal and other actions to reduce UIS and other Medi-Cal and IHSS costs. In total, the proposed health and other budget reductions add up to $5 billion in 2025-26, growing to $14.8 billion of estimated General Fund cost savings by 2028-29.
Revenue Shifts/Borrowing ($5.3 billion in 2025-26). The Governor proposes using Proposition 35 managed care organization (MCO) taxes to support Medi-Cal cost increases ($1.3 billion in 2025-26 and $264 million in 2026-27), extending the General Fund’s deadline to repay this spring’s $3.4 billion cash flow loan to Medi-Cal by several years, borrowing $150 million from the Unfair Competition Law Fund, and borrowing $400 million from the Labor and Workforce Development Fund. Case law provides the Legislature with broad ability to approve multiyear loans from other state funds to help balance the General Fund budget. (The state’s overall cash position remains incredibly strong—with available funds on hand in the State Treasury of about $100 billion in recent months. These totals include General Fund balances and reserves, rainy day funds, and special fund balances.)
Fund Shifts ($1.7 billion in 2025-26). The Governor proposes shifting $1.5 billion in 2025-26, growing to $1.9 billion in 2028-29, from cap-and-trade revenues to support CAL FIRE operating costs.
Other Future Reductions. The Governor proposes $456 million of “trigger cuts” beginning in 2027-28, assuming revenues are insufficient to support budgeted state programs, to the previously planned expansion of the California Food Assistance Program to adults 55 and over regardless of immigration status ($117 million in 2027-28, growing to $163 million in 2028-29) and the previously planned tiered rate structure for foster care ($339 million in 2027-28, growing to $522 million in 2028-29). As the multiyear projection is in deficit, these cuts reportedly are assumed in that estimate.
Proposition 98 Proposals. The May Revision includes $138 billion (including $80.5 billion General Fund) for all TK-12 education programs. The revised Proposition 98 annual guarantee (paid from state and local funds) is $119 billion in 2024-25 and $115 billion in 2025-26 in the May Revision, a decrease of approximately $4.6 billion from the January budget proposal. Proposition 98 funds both TK-12 and community college programs, and the administration’s May Revision summary notes a proposed shift in the Proposition 98 “funding split” between TK-12 and community colleges related to the state’s transitional kindergarten expansion.
University Proposals. The May Revision includes smaller proposed ongoing reductions, compared to the January 2025 gubernatorial budget plan, for the University of California and the California State University systems.
Other Proposals
The May Revision proposes to close one additional state prison by October 2026, for estimated annual savings of about $150 million, based on the projected decline of the prison population (even after considering the effects of Proposition 36). The Governor also proposes various trailer bill (statutory) actions, such as streamlining construction and financing of the “Delta Tunnels” water conveyance project, regulating pharmacy benefit managers, and extension of the cap-and-trade program (including changes to ensure that at least $1 billion annually is provided to the California High-Speed Rail Project). The administration’s cap-and-trade proposal seems to implicitly assume reductions in various categories of previously planned funding beginning in 2025-26 to accommodate the use of auction funds to support Cal Fire operations noted in the “Fund Shifts” section earlier in this summary.
The Governor’s May Revision summary mentions partnering with the Legislature on key legislation essential to accelerating infill development and housing production. “A focus,” the summary says, “will be proposals that hold all permitting entities accountable to existing statutory processes and timelines to reduce delays, alongside targeted improvements to existing streamlining tools and innovative financing strategies that reduce vehicle miles traveled by supporting affordable, transit-oriented housing.” Little new housing and homelessness funding is in the May Revision based on initial reviews of the administration’s summary document. The administration is expected to begin posting May Revision Finance Letters and trailer bill proposals online later in the day on May 14, 2025.