State Budget Analysis

Thursday May 14 – Governor Gavin Newsom released his FY 2026-27 revised budget plan. Despite a $16.5 billion surge in revenues over January projections and $40 million in reserves, the Governor’s budget continues devastatingly cruel cuts to health care for the most vulnerable immigrant communities including elimination of full-scope Medi-Cal for H.R. 1 humanitarian immigrant populations, an increase in monthly premiums from $30 to $50 a month for immigrant adults and further reinstatement of the asset test for California’s seniors and persons with disabilities. Continuing to advance these brutal cuts is further evidence that they aren’t a matter of math but a matter of values. The same is true of last year’s elimination of dental care and new Medi-Cal exclusions and fees based on immigration status.

The Governor’s May Revise in response to federal guidance, additionally proposes to shift immigrant communities from Medi-Cal managed care to a fee-for-service model – creating two separate but unequal programs. In a tough budget year, we are hopeful that putting more dollars into care rather than profits will allow more Californians to keep their full benefits and coverage. However, this proposal will only be workable if it ensures communities won’t be disadvantaged by lack of access to the same network of providers and services managed care beneficiaries can access, including specialists regardless of geography, community health navigators, non-emergency medical transportation and language services, that gender-affirming care is protected, and that any savings are redirected into maintaining health care coverage for those who are eligible today while reversing cuts made to immigrant communities’ health and dental care.

Putting life-saving care for farm workers, fast food workers, and janitors on the chopping block over and over again while the state eagerly anticipates a multi-trillion dollar surplus, reveals a much deeper problem in our state. California has the resources to provide care for those who do our most thankless work and those who’ve endured unthinkable horrors to keep their families safe. We call on legislators to immediately reject health care cuts for immigrant populations, seek new revenues to protect care and commit one-time dollars into the safety-net reserve to keep our safety-net whole for the millions of Californians still at risk as federal cuts loom.

To view the full revised budget proposal, visit the Department of Finance’s website. CPEHN will continue to monitor and weigh in on the Governor’s proposed budget to ensure the Governor is adequately prioritizing the health of our most vulnerable communities.

Key Budget Changes included in the Governor’s May Revise:

Health Care:

NEW: Delays but Maintains Proposal to Strip Full-Scope Medi-Cal for Humanitarian Immigrant Populations, effective July 1, 2027 (projected cost of $668.1 million GF in 2026-27 and savings of $294 million in 2029-30 ongoing): Under this proposal, approximately 200,000 lawfully present immigrants will lose full-scope Medi-Cal and be transitioned to emergency Medi-Cal effective July 1, 2027. 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. A nine-month delay will not prevent harm; it merely shifts the timeline while creating immediate uncertainty that will disrupt patient care. We urge the Legislature to reject this harmful cut.

NEW: Increases Monthly Premiums for Immigrants with so called Unsatisfactory Immigration Status (UIS), aged 19-59 from $30 to $50 a month (projected savings of $427.3 million in 2027-28, decreasing to $314.3 million in 2029-30): The Governor’s proposal doubles down on targeting the poorest Californians by increasing monthly health care premiums for immigrant adults from $30 to $50 a month. Raising premium costs for California’s lowest income families, will force individuals to choose between paying for food and housing or staying covered. Studies show premiums lead to decreased coverage for low-income individuals – with disenrolled more likely to stay unenrolled, to experience poorer health outcomes and increased financial burden.

NEW: Transitions Immigrants with so called Unsatisfactory Immigration Status (UIS) from Medi-Cal Managed Care to Fee-for-Service effective January 1, 2027: Under new federal guidance from the Trump Administration and the Centers for Medicaid & Medicare Services (CMS), California is being forced to create two separate and potentially unequal Medi-Cal delivery systems: one for immigrants and the other for general Medi-Cal beneficiaries.[1] Specifically, the Governor’s May Revise proposes to shift approximately 2 million UIS immigrants from Managed Care to Fee-For-Service, effective January 1, 2027 for projected savings of $583.8 million ($471.6 million General Fund) in 2026-27 and $1.5 billion ($1.2 billion General Fund) ongoing. Transitioning any group from one program to another is a huge undertaking and advocates will need to be vigilant to ensure this shift to a FFS delivery system provides adequate access to care, and coverage as required by California law. This includes access to a medical home and health navigators such as CHWPRs to ensure there is timely follow-up and referrals after a doctor or emergency room visit with primary care, behavioral health care and other specialty care. We also need to ensure members in FFS do not experience unjust barriers to receiving vital benefits and supports such as translation and interpretation services, access to gender affirming care, non-medical transportation and housing, nutrition and asthma remediation services. Even with this transition, the greatest risk to immigrant communities right now remains the Governor’s proposed cuts to Medi-Cal eligibility for immigrant communities.

NEW: Reinstates the Medi-Cal Asset Test Limit for Seniors and Adults with Disabilities (projected savings of $278.3 million in 2026-27 and $495.6 million ongoing, inclusive of IHSS impacts): Prior to July 2022, to qualify for Medi-Cal, older adults and people with disabilities had to have assets below $2,000 for an individual and $3,000 for a couple, for full Medi-Cal, and had to prove their assets each year to remain eligible. The Governor’s May Revise would reduce the Medi-Cal asset limits test from $130,000 to $2,000 for an individual or $3,000 for a couple, effective no sooner than January 1, 2027. The 2025 Budget Act included a partial reinstatement of the Medi-Cal asset limit that went into effect January 1, 2026. This proposal is projected to result in 25,000 adults and persons with disabilities losing coverage in FY 2026-27 and 37,000 in FY 2027-28.

NEW: Includes an Additional $110 Million in Funds to Expand Covered California’s State Premium Subsidy Program to Individuals Earning up to 200% FPL: The Governor’s May revise includes $300 million ongoing from the Health Care Affordability Reserve Fund (HCARF), an increase of $110 million Health Care compared to the Governor’s January Budget, for Covered California to expand the state premium subsidy program to enrollees up to 200 percent of the Federal Poverty Level. A $190 million allocation from HCARF in 2026 helped to provide state-funded tax credits for individuals earning up to 165 percent of the FPL (approximately $26,000 annually for an individual). This assistance was critical in reducing disparities and keeping enrollment consistent for the lowest income populations, compared to last year. While this is an important first step, more funds are needed to ensure continued coverage for the over 130,000 lawfully present immigrants, who are expected to lose all federal financial assistance due to H.R. 1 changes, starting in 2027.

FAILS: to Invest in Medi-Cal Community Health Workers, Promotoras, and Health Representatives: The budget fails to include $4 million one-time additional General Funds for CHW/P/Rs to assist with enrollment and health navigation as part of HCAI’s Immigrant and Health Resilience Fund. CHW/P/Rs are trusted messengers embedded in the communities that will be most affected by Medi-Cal changes. Due to federal H.R. 1 impacts and state budget cuts, including new federal work requirements, higher monthly premiums, and immigrants with UIS moving to FFS, there will be as many as 3 million Californians at risk of losing access to critical physical, behavioral and oral health services. This $4 million investment will allow CHW/P/Rs, who are uniquely positioned to meet this need, to keep eligible individuals enrolled or connect those losing coverage to low or no-cost care. With the 2026-27 budget still being finalized, there remains an opportunity for the state to make this critical investment in the workforce best positioned to protect coverage access for California’s most vulnerable communities.

FAILS: to Restore Harmful Cuts to Immigrant Eligibility and Benefits in last year’s Budget: The Governor’s May Revise maintains the discriminatory Medi-Cal enrollment freeze for undocumented which has already resulted in significant coverage losses across California, fails to address harmful work requirements or to restore dental for many California immigrants.

NEW: Projects CalAIM reductions in Enhanced Care Management (ECM) and Community Supports (CS) ($68.3 million GF in 2026-27 and more ongoing): to refine eligibility criteria, service definitions, utilization management criteria, and payment adjustments for both ECM and certain CS services effective January 1, 2027. This includes a proposal to constrain referral sources for Asthma Remediation services. With already low utilization rates, this proposal could add an additional, onerous barrier to those in need of this service.

NEW: Eliminates Medi-Cal Acupuncture Benefit (General Fund savings of approximately $5.4 million in 2026-27 and $13.1 million ongoing)
The May Revision proposes to eliminate the optional adult acupuncture Medi-Cal benefit effective January 1, 2027. The Legislature last year rejected the Governor’s proposal to eliminate acupuncture benefits. The Governor’s proposal would reduce access to culturally responsive treatment for chronic pain and other health needs.

Mental Health:

NEW: Eliminates the Commission for Behavioral Health Community Advocacy Program ($6.7 million ongoing): The Governor’s May Revision proposes permanently eliminating the legally mandated Community Advocacy Program, which supports statewide and local community engagement, advocacy, education, and systems participation efforts led by consumers, families, and BIPOC communities. The cut would immediately impact 16 contracts across nine populations, including LGBTQIA+ communities, diverse racial and ethnic minorities, veterans, youth, consumers, families, and immigrants and refugees. This includes CPEHN’s Right to Heal and Immigrant & Refugee initiatives, which support culturally responsive community engagement across 22 community-based organizations and helps ensure behavioral health systems are informed by the experiences and priorities of impacted populations. For many smaller organizations, these partnerships also provide important capacity to understand and engage in complex behavioral health policy changes they would otherwise lack the resources to track independently, filling a gap where state infrastructure is limited. At a time of significant behavioral health system transformation, and amid growing threats to culturally responsive programs, immigrant communities, and coverage access resulting from federal policies and the state’s response to them, this proposal would dismantle critical participatory and community-based infrastructure when this strong community partnership and resources are needed most. We urge the administration to restore this funding and call on the Legislature to reject this cut.

NEW: Includes Additional Detail on Proposition 1 Behavioral Health State Investments ($174.8 million Behavioral Health Services Fund for the Department of Public Health, $131.1 million Behavioral Health Services Fund for the Department of Health Care Access and Information, and $10 million Behavioral Health Services Fund for the Commission for Behavioral Health in 2026-27, with $211.9 million coming from Behavioral Health Services Fund in lieu of General Fund in 2026-27): The May Revision provides additional details and specifics on the Governor’s January placeholder proposal to use Behavioral Health Services Fund (BHSF) dollars for workforce and prevention programming. The revised proposal directs BHSF to the Department of Public Health for prevention, the Department of Health Care Access and Information for workforce, and the Commission for Behavioral Health (CBH) for innovation. As the administration implements these investments, it is essential that funds are directed toward community-based, culturally responsive approaches that reflect Proposition 1’s original intent and advance behavioral health equity.

For the Department of Public Health funding, the administration should prioritize community-defined evidence practices (CDEPs) and prevention approaches rooted in the cultural knowledge and healing practices of communities most impacted by behavioral health inequities. The California Reducing Disparities Project (CRDP) exemplifies this approach, and years of evaluation have demonstrated its effectiveness and cost efficiency, yet it is currently expected to end in June 2026. A recent coalition budget request urges the Legislature to allocate $30 million to sustain CRDP for two additional years, citing evidence that the program improves access to care for vulnerable communities, improves community trust, reduces reliance on crisis services, and generates public savings. We urge the state to prioritize sustaining CRDP so communities can continue accessing trusted, effective behavioral health services.

The May Revision also proposes $10 million BHSF for the CBH in 2026-27. This appears to cut the expected Innovation Partnership Fund (IPF) allocation in half. DHCS’s own Proposition 1 FAQ projected “$20 million annually” for the IPF, and SB 326 authorized a maximum of $20 million annually from 2026-27 through 2030-31. Reducing the IPF to $10 million at the very start of BHSA implementation limits the number of projects that can be funded. We urge the state to restore the full $20 million annual allocation and ensure innovation investments prioritize culturally responsive, community-designed behavioral health models, instead of technology-driven approaches disconnected from community priorities.

Revenue: Managed Care Organization Tax/Other Proposals:

NEW: Proposes Renewed MCO Tax Beginning 2027 Not Subject to Proposition 35 (projected revenue $575 million in 2026-27, $2.3 billion each in 2027-28 and 2028-29, and $1.7 billion in 2029-30)

The federal government finalized new provider tax rules in February 2026, which granted California an additional six-month transition to bring the state’s Managed Care Organization (MCO) tax into compliance. The revised budget maintains the existing MCO tax will expire at the end of 2026 and includes $4.5B in 2025-2026 and $2.5B in 2026-2027 to support Medi-Cal and offset General Fund spending. The current MCO tax additionally supports $1.3 billion in 2025-26, $2.4 billion in 2026-27, and $150 million in 2027-28 for increases in managed care base capitation rate payments and other payments that are subject to the Proposition 35 spending plan.

After the current MCO tax expires, the May Revision proposes to seek federal approval to renew the MCO tax for 2027-2029 with two components:

1. A tax “substantially similar” to the current tax that complies with the provisions of Proposition 35.
2. A tax that is not “substantially similar” that is not subject to Proposition 35 and conforms to new federal rules.

In budget hearings, DHCS confirmed that they do not expect the first component to be approved by the federal government because Proposition 35’s requirements conflict with new federal rules. DHCS has previously shared that an MCO tax that complies with both Proposition 35 and the new H.R. 1 rules would generate at most only $75 million annually. Since Proposition 35 does not explicitly prohibit multiple MCO taxes, the second component, if approved by the legislature, would be independent of Proposition 35 and not subject to Proposition 35’s rigid spending rules.

The new 2027 MCO tax would generate $575 million in 2026-27, $2.3 billion each in 2027-28 and 2028-29, and $1.7 billion in 2029-30 – with the administration proposing to use this revenue to support the existing Medi-Cal program (by offsetting General Fund spending) and to maintain existing 2024 targeted provider rate increases for primary, maternal, and non-specialty mental health care. The new 2027 MCO tax only achieves these revenues by increasing the tax on commercial health plans which risks raising premiums for consumers. DHCS is proposing an average tax rate of $8.85 (per member per month) which, if passed onto consumers, could increases premiums by up to $425 a year for a family of four. However, the state has limited options to generate meaningful revenue while complying with H.R. 1 rules and would otherwise have to find $2 billion elsewhere in the budget. Any MCO tax proposal must (1) balance the financial impact on commercially insured Californians with (2) the important objective of preserving coverage and support for the existing Medi-Cal program, not simply as a means to backfill the General Fund.

NEW: Proposes Grants for Hospitals in Immediate Financial Distress ($50 million General Fund in 2026-27 to the Department of Health Care Access and Information): The May revise proposes additional funds to support grants to hospitals in immediate and significant financial distress. The proposal notes that the Administration will continue to work with the Legislature on the details, signaling that key implementation questions remain unresolved, including what eligibility criteria would apply. The Legislature has already taken action this budget year: AB 108 provides a $25 million one-time appropriation in grants for nonprofit and public hospitals experiencing immediate and significant financial distress. The goal is to quickly stabilize a small number of hospitals and help preserve access to critical health care services for vulnerable communities across California. To be eligible, hospitals must have fewer than 10 days cash on hand, have exhausted other financial options, and serve critical patient populations where more than half of patients are enrolled in public programs or are uninsured. Lawmakers are also considering AB 1923, which would continue and expand the existing Distressed Hospital Loan Program into 2026-27. As the Legislature considers additional distressed hospital payments and loans, it is critical that any funding be directed to hospitals that have exhausted all other financing options, including from affiliated health systems or private equity owners, and that funds are used to maintain access to critical services. Going forward, the Legislature must have serious conversations about the long-term sustainability of safety-net hospitals and explore alternative financing models.

Other Highlights/Changes:

MAINTAINS Proposal to Require Immigrants in State-Only Medi-Cal to Comply with H.R. 1 Work Requirements and 6-Month Renewals: The May Revise continues the Governor’s proposal to apply H.R. 1’s burdensome work requirements and more frequent renewals to immigrants in state-only Medi-Cal, even though there is no federal requirement to do so. This proposal will cause unnecessary harm, particularly for Medi-Cal members who may not have legal authorization to work in the U.S., and strain limited county resources.

MAINTAINS the Elimination of Dental for Adults with Unsatisfactory Immigration Status (UIS): The May Revision does not propose any changes/reversals/delays to the Governor’s plan to eliminate full scope dental coverage for undocumented adults and certain immigrants with legal status, which means the administration intends to move forward with the proposal despite its serious consequences on access, equity, long term health outcomes, and fiscal impact. If implemented, this would reduce access to oral health care for immigrant communities already facing disproportionate barriers to care, increase emergency department utilization for preventable dental conditions, increase medical debt, ultimately general higher costs for the state, and deepen existing health inequities. We urge the administration to reconsider and reverse this decision before it takes effect in July 2026.

Funds Statewide Menopause Campaign ($3 million one-time General Fund to the Department of Public Health): The Governor’s May revise is providing funds specifically for a statewide menopause public awareness campaign to increase awareness of perimenopause and menopause. Given this was a figure that was anticipated in the January budget’s $3.4 million menopause services package, this does not represent a new proposal but provides a clearer programmatic commitment to the awareness campaign as a discrete initiative. This proposal continues to lack explicit equity considerations, such as how the campaign will reach communities that face the greatest barriers to menopause care, low-income and communities of color.

Continues to Implement Rural Health Transformation Program ($233.6 million in federal funds for FY 2026): The Governor’s May revise does not include any new state investments in rural health. In January, the Governor’s budget highlighted that California was awarded $233.6 million in federal funds for FY2026 through the federal Rural Health Transformation Program (RHTP) to improve health care access for rural and frontier communities. California’s approach, the California Rural Health Transformation (CalRHT) program, is led by HCAI and organized around three initiatives: the Transformative Care Model, Workforce Development, and Technology & Tools. As of April 2026, CMS approved California’s revised budget, and HCAI is preparing to release Requests for Applications in late spring 2026, with grant awards anticipated in summer through fall 2026. While this federal investment is a meaningful step, it is critical that implementation prioritize the providers most trusted in rural communities. CPEHN urges that CalRHT funding support CHW/P/Rs, Peer Support Specialists, and doulas. These community-based workforces are uniquely positioned to reduce health disparities in rural areas and were identified by stakeholders as a priority during HCAI’s engagement process. As the state continues to implement the RHTP, ensuring these providers are embedded in rural care networks will be essential to reaching the most underserved rural Californians.

Human Services:

NEW: Increases Funding for Immigration Legal Services ($20 million one-time General Fund): The Governor’s May Revise includes a one-time $20 million General Fund investment to support legal strategies that expand capacity to assist Californians facing immigration court proceedings, particularly individuals in civil immigration detention. Funding would remain subject to existing state law prohibiting state-funded legal representation for individuals with certain criminal histories.

NEW: Increases Funding for CalFood Food Banks ($30 million one-time General Fund in 2026-27): The Governor’s May Revise includes a one-time $30 million General Fund augmentation for food banks through the CalFood program in FY 2026-27. This funding builds on the existing $8 million ongoing General Fund already provided annually for this purpose.

[1] https://www.medicaid.gov/federal-policy-guidance/downloads/smd25003.pdf