State Budget Update

On Friday, January 9^th, Governor Newsom released his FY 2026-27 state budget. The Governor’s $248.3 billion spending plan includes no new revenue proposals to backfill the impact of federal H.R. 1 and state budget cuts, which combined, are expected to result in a loss of physical, behavioral and dental coverage for 500,000 Californians in 2026-27 alone. The Governor’s budget would invest $3 billion by the end of 2026-27 in the state’s “Rainy Day” fund to build the overall reserve, even though it’s raining for Californians right now.

For the second year in a row, the Governor is proposing to balance the budget off the backs of California’s immigrant communities through an additional $1.1 billion in cuts to health care coverage for the state’s most vulnerable communities. Under this proposal, California will strip full-scope Medi-Cal from approximately 200,000 immigrants who are survivors of domestic violence, trafficking and other traumas. Despite being framed as a new federal policy, this proposal would reverse multiple decades-long state commitments, enshrined in state law, to care for these populations.

If this proposal is approved, refugees who often need ongoing health care for injuries, nutritional deficiencies, PTSD, or exposure to infectious disease will be torn away from their doctors, therapists, and medications. Survivors of domestic violence or trafficking may be forced to remain in abusive situations longer than they otherwise would because leaving will mean they lose food or medical support for themselves and their children. The budget additionally confirms the Administration’s plans to require immigrants, including those without work authorization, to meet H.R. 1 work requirements and 6-month renewal requirements even though the H.R. 1 requirements do not apply to state only programs. All together, these policies will exacerbate coverage losses for many undocumented immigrants who will be prohibited from re-enrolling due to the freeze passed in FY25-26 budget actions.

Medi-Cal Overall:  

The Medi-Cal budget includes $196.7 billion ($46.4 billion General Fund) in 2025-26 and $222.4 billion ($48.8 billion General Fund) in 2026-27. Medi-Cal is projected to cover approximately 14.5 million members in 2025-26 and 14 million members in 2026-27, more than one-third of the state’s population.

The Governor’s budget projects $1.4 billion in projected General Fund costs in FY 2026-27, as a result federal policy changes to Health and Human Services programs under H.R. 1. Of this amount, $1.1 billion in additional costs are in Medi-Cal and $300 million are in costs to CalFresh, the state’s Supplemental Nutrition Assistance Program providing food purchase assistance for adequate nutrition to more than 3 million California households.

Medi-Cal Caseload:

California’s Medi-Cal program covers close to one-third of the state’s population. With the implementation of federal and state cuts, the Governor’s proposed budget assumes an additional 500,000 reduction in the Medi-Cal caseload from 14.5 million in FY 2025-26 down to 14 million members in FY 2026-27. 

Key Budget Changes:

Strips Full-Scope Medi-Cal Coverage from Certain Immigrant Populations Impacted by H.R. 1 (projected savings of $786 million GF in 2026-27 and $1.1 billion GF ongoing): Under the Governor’s proposal, approximately 200,000 lawfully present immigrants will lose full-scope Medi-Cal and be transitioned to emergency Medi-Cal. This includes adults resettled in California as refugees, adults granted asylum or withholding of removal, adults paroled into the US (after completing the five-year bar), adult survivors of domestic violence with a pending or approved VAWA application (after completing the five-year bar), adult survivors of trafficking with a pending or approved T visa or continued presence, adult Afghan or Iraqi Special Immigrant Visa holders, certain Native Americans who are not U.S. Citizens or Legal Permanent Residents. While framed as a response to federal policy under H.R. 1, current California law ensures continued coverage for  this population. The Governor’s proposed action would reverse a decades-long state commitment to care for these populations, forcing families to remain in abusive situations and/or individuals fleeing violence to forgo critical medical care in order to meet basic survival needs.

Applies Federal Work Requirements to Immigrants who Receive State-Funded Medi-Cal: The Governor’s budget applies H.R. 1’s burdensome work requirements, effective July 2027 on immigrants in state-only Medi-Cal, even though there is no federal requirement to do so. Work requirements are ineffective and could result in 3 million adults losing Medi-Cal coverage. Many immigrants do not have work authorization. This proposal will be confusing for assisters and beneficiaries to implement and will cause additional and unnecessary harm. It will accelerate coverage losses for undocumented immigrants who will be prohibited from re-enrolling due to the freeze that started on January 1, 2026.

Reflects Reduction in Federal Matching Funds for Emergency Services under H.R. 1 ($658 million in additional General Fund costs in 2026-27 and $872 million General Fund by 2029-30):  H.R. 1 requires a change in the Federal Medical Assistance Percentage (FMAP) from 90 percent to 50 percent for emergency services for ACA Adult Expansion population members with Unsatisfactory Immigration Status (UIS), effective October 1, 2026. This significant loss of federal funds will put additional pressure on California and other states to further restrict Medi-Cal eligibility and/or access to services.

Managed Care Organization (MCO) Tax/Hospital Quality Assurance Fee:

The Governor’s proposal allocates MCO Tax revenues of $4.5 billion in 2025–26 and $2.5 billion in 2026–27 to support the Medi-Cal program, along with $1.6 billion across the two budget years to increase managed care payments above 2024 levels. The Budget also reflects $65 million in 2025–26 and $95.5 million in 2026–27 in MCO Tax revenue to support qualifying community-based mobile crisis services, transitional rent, and behavioral health provider rate increases.

A recent memo from DHCS confirms the Administration plans to move forward with the MCO Tax/Proposition 35 spending plan for calendar year 2025 that was proposed in 2025–2026 Budget. The spending plan for calendar year 2026 will need to be modified due to reductions in MCO Tax revenue as a result of H.R. 1. The Proposition 35 Stakeholder Advisory Committee will continue advising the Department on how remaining MCO Tax revenues are allocated for calendar year 2026, subject to the Prop 35 requirements.

Under H.R. 1, states may not tax Medicaid providers at higher rates than non-Medicaid providers, and California’s current MCO Tax does not meet this standard. As a result, the tax cannot continue in its current form beyond a limited transition period. While CMS has approved a transition period through June 30, 2026, the Governor’s Budget assumes an additional six-month extension through December 31, 2026, when the current MCO Tax is scheduled to expire. The Administration is working to secure this additional six months, though it is unlikely that California will receive any longer transition beyond 2026 from the federal government.

If CMS does not approve the extension beyond June 30, 2026, it would result in increased state General Fund cost of approximately $1.1 billion in 2026-2027. Even if the extension is granted, the long-term outlook remains challenging: H.R. 1 significantly limits the size of any future MCO Tax, resulting in a substantial reduction in ongoing funding available to support the Medi-Cal program. Compounding these challenges, the Budget confirms the state’s application to increase the Hospital Quality Assurance Fee (QAF) will not be approved under the new federal rules, requiring the Administration to revise and resubmit its proposal to comply with updated provider tax requirements. Going forward, California can no longer rely on provider tax revenues to backfill the existing Medi-Cal program and provider payments.

Medi-Cal Mental Health:

Behavioral Health Funding ($150 million Behavioral Health Services Fund in lieu of General Fund): The Governor’s proposal includes a $150 million placeholder from the Behavioral Health Services Fund (BHSF) to support workforce and prevention programming at the Department of Health Care Access and Information and the California Department of Public Health, with details to be finalized in the May Revision. This proposal does not represent a new investment, and instead, replaces General Fund dollars with BHSF funds. This raises some concerns about how much capacity remains within the BHSF to support new or expanded prevention and community-based investments over time. If the administration intends to direct these funds toward prevention activities at CDPH, prioritizing the California Reducing Disparities Project, a community-defined, culturally responsive behavioral health prevention initiative, would help ensure that BHSF dollars are used to expand upstream supports and advance behavioral health equity, rather than simply sustaining baseline programs.

Projected growth in Behavioral Health Services Fund revenue to $4.7 Billion in 2026-27: The Governor’s budget proposal projects continued growth in revenues to the Behavioral Health Services Fund (BHSF), funded by the 1% personal income tax surcharge on incomes above $1 million established under Proposition 63 and updated by Proposition 1 in 2024. The Budget estimates BHSF revenues of $3.9 billion in 2024-25, $4.6 billion in 2025-26, and $4.7 billion in 2026-27. As a result, counties are expected to receive increased BHSA resources, creating a meaningful opportunity to strengthen local behavioral health systems and advance equity. With this increased funding, counties should adopt coordinated, equity-centered investment strategies that prioritize prevention, culturally responsive and community-based services, and workforce models that reflect and serve communities of color, immigrant and refugee communities, and individuals with limited English proficiency. Counties should also leverage BHSA funds alongside BH-CONNECT and other public funding streams to preserve behavioral health access for immigrant populations facing coverage losses amid federal and state budget and policy changes, invest in community-defined evidence practices, and ensure that new resources translate into measurable reductions in behavioral health disparities rather than simply sustaining existing systems.

988 and the Behavioral Health Crisis Continuum Implementation Supports ($25.9 million total funds, 8 permanent positions): The Governor’s proposal includes funding and staffing resources to strengthen implementation supports for California’s 988 services, including 8 permanent positions and $25.9 million in State Operations and Non-Estimate Local Assistance expenditure authority. This investment reflects the growing demand for crisis services and the need to improve statewide infrastructure and coordination to ensure timely and effective response. As the state expands capacity, it will be important that implementation efforts prioritize equity and ensure that 988 is accessible and responsive for communities facing persistent barriers to care, including immigrant and refugee communities. We urge the administration to use these resources to ensure 988 better meets the needs of immigrants, especially immigrants experiencing immigration enforcement-related trauma, and communities impacted by Medi-Cal coverage restrictions.

Medi-Cal Community-Based Mobile Crisis Services ($431.5 million total funds across 2025-26 and 2026-27): The January proposal continues funding to sustain the Medi-Cal community-based mobile crisis benefit authorized under federal law through March 31, 2027. The budget signals the administration plans to submit a Medi-Cal State Plan Amendment to continue the benefit after that date, but to restructure it as an optional benefit beginning April 1, 2027. While maintaining the Medi-Cal mobile crisis benefit is essential to strengthening the behavioral health crisis continuum, making the benefit optional risks uneven availability across counties, shifts greater cost and responsibility to local systems, and could result in higher geographic and racial/ethnic disparities. Ensuring mobile crisis remains a reliable, statewide component of California’s crisis response infrastructure is especially important for communities of color, immigrant and refugee communities, and individuals with limited English proficiency, who face heightened barriers to care and greater risk of harm when crisis response relies on emergency departments or law enforcement involvement. We urge the state to maintain the Medi-Cal mobile crisis benefit as a consistent statewide benefit beyond March 2027 to avoid widening gaps in the safety net and ensure timely, equitable crisis response for all Californians. To support a continued statewide implementation, the administration could redirect funding from law enforcement-based crisis response toward the Medi-Cal community-based mobile crisis benefit. Law enforcement involvement in behavioral health crises disproportionately harms communities of color and immigrant communities, and increases the risk of escalation and trauma. Redirecting resources from law enforcement to mobile crisis response would help strengthen the state’s crisis continuum and reduce reliance on law enforcement as the default response to behavioral health emergencies.

Covered California

Expiration of Enhanced Premium Tax Credits for Covered California Enrollees: Close to 1.8 million Californians receive health care coverage through California’s state-based marketplace, Covered California. In 2025, the President and Congress failed to approve an extension of enhanced tax credit subsidies which are critical to keeping health care premiums affordable. As a result of Congressional inaction, Covered California premiums are expected to rise by an average of 97%. The Governor’s budget does not include additional funding to enhance affordability or access through Covered California.

Oral Health

Eliminate Dental for Adult UIS (additional $134.6 million General Fund cost reduction in 2026-27): The proposal continues the administration’s plan to eliminate full-scope dental coverage for adult Medi-Cal members with Unsatisfactory Immigration Status (UIS), and reflects an additional $134.6 million General Fund cost reduction in 2026-27 associated with this cut. This builds on the 2025-26 May Revision proposal to eliminate these benefits effective July 1, 2026, with impacted individuals retaining only restricted-scope emergency dental coverage. The inclusion of “additional” savings in 2026-27 suggests the administration anticipates a greater fiscal impact than previously projected, potentially reflecting updated assumptions about the size of the population affected and/or broader Medi-Cal eligibility and renewal changes that could shift more immigrant adults into restricted-scope or state-only coverage categories. Regardless, this proposal represents a significant reduction in access to essential oral health care for vulnerable immigrant communities and will deepen racial/ethnic health inequities, as these communities already face disproportionate barriers to oral health care. Eliminating dental coverage will increase untreated disease, preventable emergency department utilization and associated state costs, and medical debt, while further destabilizing communities already experiencing growing trauma and barriers to care amid federal and state policy changes.

Public Health & Prevention

Besides the note on behavioral health above, there are no other proposed changes for equity-focused public health programs for the California Department of Public Health

Workforce and CHW/P/Rs

• CHW/P/Rs: There are no proposed changes to the CHW/P/R Medi-Cal benefit.
• Health Care Workforce: The state has made major workforce investments, totaling about $3.8 billion ($1.9 billion for BH-CONNECT and $1.9 billion for other workforces). The state’s workforce focus areas are nursing, primary care, public health, and behavioral health. The state is leaving out some critical trusted workforces who often have lived experience and come from the communities they serve, such as Community Health Workers, Promotoras/es, and Representatives (CHW/P/Rs), Peer Support Specialists (PSS), and doulas. Including these critical community providers would help to reduce disparities.

Repdroductive Health

• Reproductive Health Grant Program: In addition to the $146 million in existing funding from MCO tax funds ($90 million) and the Abortion Access Fund ($56 million), the state is giving $60 million in one-time funding for HCAI to give out grants to reproductive health care providers. While this is a sizable amount of funding, this is only one-time funding and therefore doesn’t create long-term funding stability for providers. Additionally, reproductive health access is being primarily supported through special funds rather than state GFs. Sustained, ongoing investments in reproductive health will be necessary to ensure provider viability and equitable access as demand will continue to grow.
• Menopause Services: The budget includes further investments to support health care coverage for perimenopause and menopause ($3.4 million in 2026-27, including up to $3 million in GF, and $391,000 Managed Care Funding ongoing). This care would include coverage support, provider education, and a statewide public awareness campaign. While this is a meaningful step toward recognizing menopause as a key public health issue, the funding structures suggests the states focus on awareness and guidance rather than lasting coverage reform, as well as lacks equity considerations.

Rural Health Transformation Program

• The state was awarded $233.6 million in federal funds for FY2026 in order to improve health care access for rural and frontier communities. This includes expanding access to care, strengthening the rural/frontier health workforces, and improving infrastructure. Policymakers should consider investments to support Community Health Workers, Promotoras/es, and Representatives (CHW/P/Rs), Peer Support Specialists (PSS), and doulas. Including these critical community providers would help to reduce disparities in rural areas.

State-Only Health Programs

While the budget reflects significant Medi-Cal coverage changes, it does not include targeted investments to support individuals navigating coverage loss and transitioning to state-only health programs, such as Every Woman Counts (EWC), Breast and Cervical Cancer Treatment Program (BCCTP), Medi-Cal Dialysis-Only, and Family PACT. As Medi-Cal coverage changes and individuals fall off coverage, ensuring continuity of care will require proactive investments in navigation and enrollment assistance.

Specific Immigrant Programs

• Supplemental Nutrition Assistance Program (SNAP) – CalFresh
  • The Governor is proposing a budget that assumes $66.2 million less for CalFresh in 2026–27 because federal changes would make thousands of people ineligible for food assistance. These includes some lawfully present immigrants, adults without dependents who can’t meet stricter work rules, people relying on utility assistance, and those experiencing housing instability. This budget fails to invest dollars to maintain eligibility for these populations causing more families to lose food support, while counties, food banks, and community organizations struggle to meet the growing need.

CalWORKS and Child Care

The Trump Administration froze safety-net funding for TANF (CalWORKs) and Child Care to five states, which included California citing claims of fraud without any factual evidence. This illegal action is intended to further undermine California’s safety net. States impacted have filed a lawsuit to block these actions, however depending on the outcome there may be further funding losses impacting these human services programs that may need to be addressed in this budget cycle.

In-Home Support Services 

• In-Home Support Services (IHSS): For 2026-27, the budget includes $33.4 billion ($12.5 billion GF), with an average monthly caseload at 875,344 recipients. There are some key major changes to this program:
  • Given IHSS is a Medi-Cal benefit, program services are tied to Medi-Cal eligibility. Previously, if someone temporarily lost Medi-Cal coverage, they would be put on the IHSS Residual program to keep some hours as their Medi-Cal status got resolved. However, this budget reduces funding ($86 million GF) for IHSS so that when someone loses Medi-Cal coverage, they will also lose IHSS coverage (beginning 2026-27). Given the impacts of HR1 and state budget cuts, this could mean that more people lose IHSS benefits.
  • There will no longer be a IHSS Backup Provider System, reducing program funds by $3.5 million GF (beginning 2026-27).
  • While this proposal does not cut existing IHSS hours, it removes the state’s funding for increased care needs over time (reduction of $233.6 million GF). The change is about who is paying for growth of hours between state and the county, not a question of what services an individual is eligible for (beginning 2027-28).