California lawmakers must close a $12 billion budget hole this year as health care costs rise, the stock market whipsaws and President Trump’s tariffs darken the state’s economic and revenue outlook, Gov. Gavin Newsom (D) said Wednesday.
And that’s without taking into account cuts to federal social services funding that Congress is debating.
“Yes, we anticipate cuts from the federal government,” Newsom said during a speech announcing his revised budget plan. “We will be tasked with making decisions in a very challenging and vexing time.”
Newsom’s revised budget would spend $321 billion to fund state government in Fiscal Year 2026, which starts on July 1, about $300 million less than he proposed in January.
He would fix the deficit primarily by cutting spending on Medicaid, the public health insurance program for low-income people jointly funded by states and the federal government.
Newsom proposed halting new enrollment of undocumented adults in California’s Medicaid program, charging undocumented adults $100 monthly premiums starting in 2027, eliminating their long-term care coverage, and reducing their dental coverage.
He also would reinstate an asset test for all seniors and disabled adults enrolled in Medicaid and end Medicaid coverage for GLP-1 drugs for weight loss, among other changes.
The cost-cutting proposals would save the state $5 billion this year and $14.8 billion through FY 2029, according to budget documents. Newsom would raise an additional $5 billion this year by shifting money between state accounts and borrowing money.
“The challenge that we face this year, and the challenge we will face for many years, is the growth of our Medicaid system,” Newsom said. He said his proposals would address this year’s deficit and reduce deficits projected for future years.
Newsom said 1.6 million undocumented people are now enrolled in California’s Medicaid program,about 10.7% of total state enrollment.
“Our approach was not to kick people off, and not to roll back the expansion, but to level-set on what we can do and what we can’t do,” Newsom said of his proposed cuts to their coverage. “We have to tighten up.”
States across the country have downgraded their expectations for near-term tax collections since Trump’s tariff plans began to weigh on trade, business investment and the stock market.
California budget writers went from expecting a small FY 2026 surplus in January to expecting a $16 billion revenue loss over the next two years, Newsom said, largely because they now expect capital gains revenue to fall over that period.
His budget team wrapped up its economic forecast in mid-April, in the days after Trump sent the stock market into a tailspin by announcing major tariffs on all U.S. trading partners — then triggered a rally by scaling them back a week later.
Meanwhile, California’s Medicaid spending has ballooned as many more people enroll than expected, particularly seniors.
Assembly Minority Leader James Gallagher (R) took issue with blaming Trump for the budget situation.
“We’re in this mess because of his reckless spending, false promises, and failed leadership,” Gallagher said of Newsom in a statement.
Newsom’s revised budget preserves many of his priorities, including funding for public schools, universal preschool, mental health services and water infrastructure.
His budget would create new rules for licensing and regulating pharmacy benefit managers and expand the state’s ability to buy brand-name drugs.
And it includes provisions aimed at speeding up home building, such as by exempting certain urban housing projects from project-level review under the California Environmental Quality Act.
During his speech, Newsom praised bills moving through the legislature that would do just that.
“Language will be included in the budget to make this happen, to get this done,” he said.