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Following weeks of negotiations, Gov. Gavin Newsom and Democratic legislative leaders have agreed on a $351.7 billion budget next year that raises some taxes, sets aside $6.4 billion for the year after and softens or delays billions of dollars in planned social service cuts.

The budget, Newsom's last, will leave the California budget balanced for two consecutive years and reduce future year deficits significantly, state leaders say. Lawmakers are poised to adopt the deal on Monday.

"This budget demonstrates responsible choices that protect our fiscal strength while continuing to invest in what matters most," Newsom said in a statement.

The state faced a steep funding cliff in January amid ballooning costs of Medi-Cal, the state's healthcare program for low-income Californians, and the threat of losing tens of billions of federal dollars under President Donald Trump's budget bill.

But since then, tax revenue has grown faster than expected, thanks to the artificial intelligence-driven economic boom. The final budget agreement largely relies on that windfall and new taxes Newsom has championed, along with delayed healthcare cuts and suspended payments to K-12 schools and state reserves to balance the books and slash future deficits.

The Newsom-backed tax measures, which the Legislature approved earlier this month, will apply a sales tax to everyday computer software, cap business tax credits and raise the tax rate on commercial healthcare providers.

The budget deal also requires the next governor to consider penalizing big corporations for having employees on Medi-Cal — an idea from Senate Democrats — unless Congress repeals Trump's Medi-Cal cuts before then. Sen. María Elena Durazo, a Los Angeles Democrat and a member of the legislative Latino caucus, said the plan does not go far enough to discipline companies that pay low wages.

"Another cycle of large corporations paying nothing while their underpaid workers stay on Medi-Cal, and we foot the bill as taxpayers," Durazo said during a Monday hearing.

"This is a budget that bought time. Medi-Cal delayed, not resolved, not restored."

While Newsom proposed deeper cuts in May, the final budget softens the blow and includes new spending. It delays most cuts to Medi-Cal services and preserves funding for in-home care for low-income Californians. It gives counties $900 million in homelessness funding, almost double the $500 million Newsom wanted. It also adds 22,700 state-funded child care spaces to address the need to care for children three and under.

Newsom and lawmakers couldn't settle on a full spending plan for the Greenhouse Gas Reduction Fund, the state's main source of cash for climate programs, punting negotiations to the summer. They did agree to tap the fund for electric vehicle incentives and to backfill the fire department budget.

The holdup is largely due to the new climate rules Newsom's administration adopted in May, which could cut the fund in half, sparking a fight between Senate Democrats and Newsom over funding priorities.

Republicans blasted the budget deal, criticizing Democrats for passing policies through the budget process without much advance notice. The process allows state leaders to fast-track complicated policies instead of facing scrutiny in months of public hearings.

"It's an abuse of the process that we have unfortunately got all too accustomed with," said Sen. Roger Niello, a Roseville Republican, on Monday.

Delaying most Medi-Cal cuts

The deal includes $300 million to subsidize private healthcare to lower costs for low- to middle-income Californians, a Newsom priority. The governor proposed it in May to erase premiums for lowest-income residents and reduce out-of-pocket costs for middle-class households.

It also includes $250 million in grants to public hospitals and up to $140 million for those in "significant financial distress." Several hospital advocates, including the California Association of Public Hospitals and Health Systems, had advocated for $500 million in funding as hospitals risk scaling back services or closing altogether due to the lost federal funds.

The state also agreed to give counties $200 million to more frequently verify low-income people's eligibility to receive health and food benefits, which the Trump administration requires. But the budget deal leaves out $125 million the Legislature wanted to give counties to set up an indigent care system to care for those falling off of Medi-Cal.

Counties urged state leaders to pursue an alternative before the legislative session ends in September. Otherwise, "counties will be forced to cut core services — threatening public safety, slashing behavioral health and public health services, and driving up homelessness," according to a joint statement from the California State Association of Counties and other county associations.

Newsom agreed to scrap his proposed cuts to the In-Home Supportive Services program, which provides in-home care to roughly 900,000 low-income Californians, after the Legislature's opposition.

They also agreed on a less restrictive Medi-Cal asset test for seniors and those with disabilities than Newsom proposed: In addition to the income tests, starting July 2027, individuals must own $21,000 in assets or less ($31,000 for couples) to qualify for Medi-Cal. The current ceiling is $130,000 for individuals and $195,000 for couples.

While Newsom wanted to increase the monthly premium for undocumented adults enrolled in Medi-Cal from $30 to $50, the final deal leaves the decision to the next governor.

The deal preserves immigrant healthcare by delaying many cuts: By January, the state will start transitioning roughly 2 million Medi-Cal enrollees — most of whom are undocumented immigrants — to a fee-for-service system by Jan. 1, 2027.

The change will allow the state to continue receiving funding for Medi-Cal and save $470 million next year, but those immigrants will lose access to benefits such as case management, housing assistance and medically tailored meals.

Starting July 2027, the state will limit state-funded healthcare coverage for roughly 150,000 immigrants, including refugees, asylees and human trafficking survivors, to emergency and pregnancy care only. The budget plan also delays other cuts, including dental benefits for undocumented Medi-Cal enrollees and clinic reimbursements for Medi-Cal services, until July 2027.

"While we are relieved this agreement spares immigrant communities from losing access to doctors, dentists and trusted community providers this year, our work is far from over," said Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Network.

Newsom gets wins on school chiefs overhaul

The deal largely preserves Newsom's May spending plan for K-12 education.

It increases special education funding by $2.4 billion and gives school districts and community colleges higher cost-of-living increases to provide 14 weeks of pregnancy leave for their employees, something teachers unions have championed for years.

But the latest spending plan also withholds $3.9 billion in constitutionally guaranteed funding from K-12 schools, an accounting mechanism Newsom wanted to use in case the state overcommits with a revenue forecast that is too optimistic. If the state collects more tax revenue in the next year than projected, the budget deal requires the state to use a portion of that to pay down what it owes the schools.

Disappointed education advocates criticized state leaders for shortchanging school districts. The California Teachers Association, the state's largest teachers union, accused state leaders of violating the state Constitution and said it would consider suing.

"At a time when both public schools and the voting rights of our communities face growing attacks from the federal government, California lawmakers should be standing up for our students and exercising the democratic principles that have made California the nation's progressive leader," CTA President David Goldberg said in a statement.

The deal also allows Newsom to radically diminish the authority of the elected state superintendent of public instruction, shifting K-12 school governance to a new education commissioner appointed by the governor. Starting Jan. 15, 2027, the superintendent will become one of 13 members on the State Board of Education led by the commissioner.

Newsom proposed the idea in January to make education governance more coherent, gaining support from a wide array of education advocates. California is one of nine states that still elect a schools chief, whereas other states allow the governor to appoint them.

The CTA, some senators and candidates running for superintendent were skeptical of the promised outcome and slammed Newsom for jamming the policy through the budget process, especially when voters in November are already set to vote for a superintendent whose duties will be significantly pared down.

California voters have rejected four ballot measures to abolish the superintendent role, according to the nonpartisan Legislative Analyst's Office.

"To me, it feels very deeply democratically cynical," said Sen. Chris Cabaldon, a Napa Democrat, during a May hearing of the proposal. "That the voters four times before have said no to making these reforms. That we're just gonna try to do it without them and leave in place the shell of what the constitution requires, in order to get around that."

New EV incentive

While state lawmakers punted most of the climate money negotiations, they agreed with Newsom to allocate $1.25 billion in the greenhouse gas fund for the state's fire department.

They also agreed to set aside $356 million for zero-emission or hybrid vehicle incentives, with $115 million coming from the climate fund. That includes $85 million over the next five years to help low-income Californians replace old gas-powered vehicles with cleaner ones.

Roughly $135 million is reserved for electric trucks and buses. Another $135 million will help first-time buyers of new light-duty electric vehicles priced at $50,000 or less and used ones at $25,000 or less.

The deal allows the California Air Resources Board, the state's climate regulator, to set the incentive amount.

Lawmakers also agreed with Newsom to fund the state's community air protection program established in 2017 to reduce the harm of air pollution, most of it from the state general fund.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.

Yue Stella Yu

Newsom's parting gift: A budget that delays California's deep cuts to 2027