Read CPEHN’s analysis of the 2025-2026 State Budget. From January to July, the Governor, Legislature, advocates, and community partners debated how California’s historic surplus should be used.
Budget Protects Critical Health Investments & California’s Values in Face of Unprecedented Federal Threats
With core safety net programs largely spared from cuts, CA leaders can do more to advance health equity in final budget
SACRAMENTO, CA – The California Pan-Ethnic Health Network (CPEHN) applauded Gov. Newsom’s budget proposal to maintain critical investments in the state’s health care safety net at a time when the incoming Trump administration threatens care for 15 million Californians, the majority children and people of color.
CPEHN Executive Director Kiran Savage-Sangwan said:
“Gov. Newsom’s budget is a strong statement that California will stand by our values and our commitment to ensure every person has the opportunity to be healthy. Our state’s leadership is vital now as the Trump Administration aims to decimate the Medi-Cal program one in three Californians count on for their care. The deep cuts in Medicaid and Affordable Care Act funding Trump’s allies demand to protect billionaire tax cuts would jeopardize access to care and worsen health disparities across the state. The devastating impacts of the Trump-backed proposals would not spare the constituents of GOP congressional districts, and CPEHN and our allies will work hard to ensure these representatives understand the consequences for our communities’ health.
“The Governor’s budget makes a strong commitment to Medi-Cal for the 2025-26 fiscal year; the Legislature can make it even stronger by restoring the investments in community health workers lawmakers prioritized last year, but were unwound by the passage of Prop. 35.
“We are encouraged to see Future of Public Health funding protected; the Avian Flu harming agricultural workers in the Central Valley and climate-change fueled fires devastating our state today make evident the need to stay prepared for threats to communities’ health.
“California can well afford to continue our progress on health equity. State revenues are stronger today because the wealthiest Californians are doing better than ever, a clear sign that they can contribute more to ensuring no one goes without the care they need to thrive.”
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CPEHN Analysis of Governor’s FY 2025-26 State Budget
On Friday, January 10th, Gov. Newsom released his proposed FY 2025-26 state budget. The $322 budget reflects a small surplus of $363 million after two years of state budget deficits. The budget includes $16.5 billion in additional revenue compared to estimates from last June but continues to rely on $7.1 billion in reserves despite a surplus and higher than expected revenues. The $229 billion General Fund spending plan maintains vital health and human services programs but refrains from including any significant new investments.
In a year of uncertainty, as the Trump Administration aims to decimate the Medi-Cal program one in three Californians count on for their care, the Governor’s budget is a strong statement that California will stand by its values and our commitment to ensure every person has the opportunity to be healthy. The Governor’s budget makes a strong commitment to Medi-Cal for the 2025-26 fiscal year; the Legislature can make it even stronger by restoring the investments in community health workers lawmakers prioritized last year, but were unwound by the passage of Prop. 35.
We are additionally encouraged to see Future of Public Health funding protected; the Avian Flu harming agricultural workers in the Central Valley and climate-change fueled fires devastating our state today make evident the need to stay prepared for threats to communities’ health. California can well afford to continue our progress on health equity. State revenues are stronger today because the wealthiest Californians are doing better than ever, a clear sign that they can contribute more to ensuring no one goes without the care they need to thrive.
Medi-Cal Overall:
The Governor’s budget allocates:
- $174.6 billion ($37.6 billion General Fund) in FY 2024-2025, an increase of $2.8 billion General Fund, driven primarily by higher enrollment, caseload growth, and pharmacy costs, partially offset by MCO tax revenues.
- $188.1 billion ($42.1 billion General Fund) in FY 2025-2026, an increase of $4.5 billion General Fund compared to revised 2024-25 expenditures, largely attributed to:
- $3.6 billion due to changes in MCO tax revenue use
- $215.2 million from growth in pharmacy expenditures, primarily due to GLP1 drugs.
- $268.5 million reflecting other base cost changes (e.g., managed care rates, enrollment, and fee-for-service utilization).
The Governor’s budget additionally includes $1.1 billion ($3 billion federal/state funds combined) tied to higher than projected Medi-Cal enrollment (450,000 individuals), due to the continuation of eligibility redetermination flexibilities post the public health emergency through June 30, 2025.
The passage of Prop. 35 and future impact on the state’s General Fund creates additional uncertainty at a time when California’s Medi-Cal program is facing unprecedented federal attacks, including Republican proposals to cap or cut Medi-Cal, eliminate the enhanced federal matching rate for single, childless adults, restrict the use of provider taxes to finance state Medi-Cal costs, lower the minimum Medi-Cal matching rate for Medi-Cal beneficiaries, and impose onerous work requirements.
Medi-Cal caseload: Medi-Cal is projected to cover approximately 15 million Californians in 2024-2025 and 14.5 million in 2025-2026, representing over one-third of the state’s population. Enrollment projections are based on higher than anticipated enrollment due in part to federal enrollment flexibilities, including waivers to increase ex parte rates, improve outreach strategies, and simplify income verification, making it easier for Californians to enroll in coverage.
A 2024 CPEHN analysis found implementation of the federal flexibilities significantly reduced racial, ethnic, and linguistic disparities in ex parte renewal, continuation, and discontinuation rates, particularly for individuals with limited English proficiency. Despite a clear benefit, the federal flexibilities are slated to expire on June 2025. If California does not act, up to 500,000 additional Californians are projected to lose their coverage in FY 2025-2026. Additional threats from the incoming Trump administration and GOP leaders to convert California’s Medi-Cal funding to a per capita cap could result in millions more Californians, a majority from communities of color, losing their health care coverage.
Managed Care Organization (MCO) Tax
The proposed budget incorporates substantial changes to the MCO tax that impact the state’s use of MCO tax revenue to support existing Medi-Cal services. This is due to the passage of Proposition 35 in November 2024 and recent amendments to the MCO tax structure, which the federal government approved in December 2024.
- Proposition 35 went into effect on January 1, 2025. Proposition 35 requires the state to request MCO tax approval from the federal government on an ongoing basis after the current MCO tax expires at the end of 2026. Proposition 35 also implements a spending plan for provider rate increases and other investments. For calendar years 2025 and 2026, Prop 35 requires the state to appropriate the following amounts to specified categories:
| Proposition 35 Augmentations | |
| Support for Existing Medi-Cal Programs | $2 billion |
| Primary Care | $691 million |
| Specialty Care | $575 million |
| Emergency Room Physicians and Facilities | $355 million |
| Behavioral Health Facilities | $300 million |
| Community and Outpatient Procedures | $245 million |
| Designated Public Hospitals | $150 million |
| Abortion and Family Planning Services | $90 million |
| Graduate Medical Education | $75 million |
| Medi-Cal Workforce | $75 million |
| Emergency Ground Transport | $50 million |
| Services and Supports for Primary Care | $50 million |
- The proposed budget includes $186 million to support the Proposition 35 investments in 2024-2025 and $3.3 billion in 2025-2026. DHCS will implement the final spending plan in consultation with the stakeholder advisory committee created by Proposition 35. Members of the advisory committee are appointed by the Governor and legislative leadership. The roll out of these investments will be delayed while DHCS works with the advisory committee to implement the augmentations. State lawmakers must monitor the implementation and asses impacts of the augmentations on patients’ access to care.
- Increased MCO tax revenue from 2024 amendments is not subject to Proposition 35’s spending plan, allowing the state to retain additional dollars to support the existing Medi-Cal program and reduce General Fund costs. In 2024, the state legislature amended the MCO tax to increase revenues by $6.7 billion from 2024-2025 through 2026-2027. The Govenor’s budget proposes to use these dollars to support the Medi-Cal program in addition to the allocations from Proposition 35 for this purpose ($833 million in 2024-2025 and $2 billion in 2025-2026). In total, the budget reflects $7.9 billion in 2024-2025, $4.4 billion in 2025-2026, and $3.3 billion in 2026-2027 to support the Medi-Cal program. However, compared to the 2024 enacted budget, this is a total decrease of $3 billion to support existing Medi-Cal services due to the passage of Proposition 35.
- The Governor’s budget fails to preserve equity investments agreed upon in the 2024 budget that were eliminated with the passage of Proposition 35. These investments included continuous Medi-Cal coverage for children under five, a living wage rate for community health workers, promotoras, and health representatives, and rate increases for private duty nursing, community-based adult services, congregate living facilities, and pediatric day health centers. Despite serving some of our most vulnerable Californians, these vital providers are left waiting for much needed investments. For example, congregate living facilities have been paid the same Medi-Cal rates for decades, leaving many at risk of closure. The legislature must act to reinstate these crucial investments.
- The future of California’s MCO tax is uncertain. In the MCO tax approval letter from the federal government, CMS warns California is exploiting a regulatory loophole and CMS plans to take “imminent action to develop and propose new regulatory requirements” and recommends California “carefully consider how to mitigate or avoid any possible budgetary and program challenges that could result” from new regulatory requirements. The legislature must anticipate declining MCO tax revenues and ensure the rate augmentations are sustainable long-term to avoid future funding cliffs.
Medi-Cal Mental Health:
- Federal Approval for Medi-Cal’s BH-CONNECT Waiver ($8 billion of federal, state, and local dollars for 5 years): In December 2024, the federal government approved the BH-CONNECT Waiver to expand the behavioral health continuum for Medi-Cal members with significant behavioral health conditions. This waiver has the potential to transform California’s behavioral health system, but it must be implemented with a commitment to equity, transparency, and sustainability. We remain concerned about the county opt-in structure, which could worsen regional disparities as well as any initiatives that may divert funding away from voluntary, community-based services. To ensure these investments improve outcomes for all Californians, especially Black, Indigenous, and People of Color communities, the state should collect and publish disaggregated data by race, ethnicity, language, gender identity, and sexual orientation to monitor its impact on disparities. Ultimately, we urge the state to prioritize culturally responsive, community-based care over institutional approaches, strengthen accountability, and ensure services are accessible and equitable for all.
- Behavioral Health Transformation ($93.5 million total funds, $55 million General Fund): Behavioral Health Transformation is the implementation of Proposition 1, which voters approved in 2024. For 2025-26, the Governor has allocated additional funding to support counties in administering this initiative. These funds will enable counties to begin developing their Integrated Plans, comprehensive three year roadmaps outlining how counties will allocate their behavioral health funding. The first County Integrated Plans are due in 2026, and counties will spend this upcoming year drafting their plans, incorporating stakeholder feedback through community engagement. We strongly encourage counties to fully utilize available tools to involve stakeholders, especially communities of color, through listening sessions, behavioral health boards, and County Board of Supervisor meetings.
- Behavioral Health Infrastructure Bond Act of 2024 ($6.4 billion): In 2024, voters approved Proposition 1, which included The Behavioral Health Infrastructure Bond Act to address the state’s behavioral health and housing crisis. One-third of the bond is allocated for permanent supportive housing, and two-thirds of the bond will fund grants for counties and private entities to build clinical treatment facilities. We are deeply concerned that the original language barring the use of funds for involuntary, locked facilities was removed during the final negotiations, now allowing bond funds to support involuntary, locked treatment facilities. To ensure these investments promote recovery, we urge the state to prioritize voluntary, community-based care and implement clear funding guidelines limiting the use of funds for locked facilities. Additionally, accountability measures must be developed to ensure funds support culturally responsive, person-centered care, especially for communities who are disproportionately impacted by forced treatment.
Covered California:
The proposed budget maintains key affordability measures approved as part of the 2023 Budget Act, including up to $165 million annually, starting in FY 2024-25 for additional subsidy assistance for low-income Californians who purchase coverage in the state’s marketplace. However, the incoming Trump administration has pledged deep cuts to health care programs including a threat to eliminate enhanced federal subsidies. If these threats materialize, California will need to set aside additional funds from the Health Care Affordability Reserve Fund (HCARF) to maintain affordability for California consumers in future years.
Oral Health:
- The 2025-2026 Budget Proposal maintains adult dental benefits in Medi-Cal Dental: Consistent access to preventive and restorative dental care continues to be a significant challenge for low-income Black, Indigenous, and People of Color communities, which leads to oral health disparities across the state. We applaud the Governor’s commitment to maintaining these essential benefits, ensuring that low-income communities can continue receiving critical oral health services.
Public Health & Prevention:
- The January budget proposal does not make major changes to the existing programs under the Department of Public Health. The “future of public health” infrastructure investment for state and local health departments from the previous budget year remains intact.
Other Health Programs:
- New HCAI investment for improving maternal and newborn health outcomes with Diaper Initiative (up to $7.4 million General Fund in 2025-26 and $12.5 million General Fund in 2026-27): Access to affordable diapers is a fundamental component of childcare, yet nearly half of families across the United States struggle to afford an adequate supply. Parents of color are disproportionately affected, often reporting greater challenges in meeting basic needs like diapers. The newly announced Diaper Initiative in California addresses this critical issue by providing a three-month supply of diapers, distributed through hospitals, at no cost to families with newborns. While this investment holds significant promise, the California Pan-Ethnic Health Network (CPEHN) seeks further clarity on the eligibility criteria for this benefit. This initiative has the potential to improve newborn health by reducing the risk of infections, diaper rashes, and urinary tract infections. It can also alleviate financial hardship for families of color and support parental mental health. The state has previously taken steps to address similar gaps. For instance, Assembly Bill 480, introduced in 2017, provided families with children aged three or younger who participated in the CalWORKs Welfare-to-Work program with a $30 monthly diaper stipend. In 2021, California received $1.2 million through the Department of Health and Human Services (HHS) to implement a Pilot Diaper Distribution Program.
- Prescription Drug Affordability—With rising pharmacy costs, the Administration will
continue to assess the main factors driving prescription drug price increases, including
the role of pharmacy benefit managers. Building on the objectives of the Office of
Health Care Affordability and CalRx, the Administration is exploring ways to increase
transparency in the pharmacy supply chain and improve the affordability of prescription
drugs for Californians. These efforts aim to help consumers, particularly in communities
of color and low-income populations, by reducing the financial burden of essential
medications, improving access to affordable prescriptions, and addressing disparities in
health care costs.
Workforce and CHW/P/Rs
- Beyond the funds already allocated in the MCO tax, the Governor’s budget fails to mention any new initiatives for the healthcare workforce.
- The Governor’s budget fails to sustain the CHW/P/R Medi-Cal reimbursement rate increases previously included in the FY 2024-2025 state budget. That budget had incorporated a 22.2% increase in reimbursement rates for CHW/P/R services, raising the rate from $26.66 to $32.58 per half-hour visit. This rate increase was supposed to be enforced starting January 1, 2025 and was a vital step toward ensuring fair compensation, as well as supporting the long-term sustainability of the CHW/P/R workforce. However, trigger language in the budget eliminated this planned rate increase following the passage of Proposition 35. While Proposition 35 establishes an important annual funding source for clinics and community-based organizations to support CHW/P/Rs, the grant program is capped at $32 million annually. Additionally, it will not take effect until 2027 and only if MCO tax revenues exceed $4.7 billion annually—a threshold that prior analyses suggest is unlikely to be met. As a result, CHW/P/Rs will not receive adequate Medi-Cal reimbursement funds. Without proper compensation, these essential healthcare workers face financial instability, jeopardizing the sustainability of their roles. CHW/P/Rs are uniquely positioned to serve underserved populations and improve health outcomes. To advance health equity, it is critical to invest in and adequately support the CHW/P/R workforce.
Specific Immigrant Programs:
While there were no significant changes to investments for immigrant programs, proposals have been introduced in the Special Session, proposing $10 million to the One California program, $10 million to the Equal Access Fund, and $5 million to the California Access to Justice Commission. However, immigrant rights’ advocates are requesting initial investments of $25 million for immigration legal services programs during the Special Session which includes: $15 million for the One California program for urgent services and $10 million for the California Access to Justice Commission’s detention representation program. CPEHN urges support for these investments given the likelihood of attacks on immigrant communities by the incoming federal administration.