California has approved a $351.7 billion state budget, marking the final budget that Gov. Gavin Newsom will sign before leaving office. The spending plan combines higher reserve funding with targeted investments in healthcare, housing, homelessness programs, and election administration while introducing tax changes aimed at preserving funding for the state’s Medicaid program.
The budget reflects months of negotiations between the governor and state lawmakers as California continues to manage long-term fiscal challenges alongside uncertainty surrounding federal policy changes.
Reserve Funds Receive Major Boost
One of the most notable elements of the budget is the decision to increase California’s financial reserves to nearly $29 billion. State leaders also agreed to place a constitutional amendment before voters in November that would expand the state’s rainy day fund.
If approved, the measure would allow California to set aside more money during stronger economic periods, providing greater flexibility when future budget deficits emerge.
Supporters argue that stronger reserves could help reduce the need for significant spending cuts during economic downturns.
Healthcare Funding Adjusted
Healthcare remained one of the most closely negotiated areas of the budget.
Rather than immediately implementing some of the reductions proposed earlier this year, lawmakers delayed several cuts affecting low-income Californians enrolled in Medi-Cal. To support the program, the state plans to continue its provider tax while restructuring portions of it to comply with new federal requirements established under the One Big Beautiful Bill Act (HR1).
The revised approach requires higher taxes on certain private health plans in addition to existing assessments. State officials believe the changes are necessary to continue receiving valuable federal matching funds that help finance Medi-Cal.
However, the California Association of Health Plans warned that higher taxes on insurers could eventually contribute to increased health insurance premiums for consumers.
Federal Approval Still Needed
Although California has adopted the budget, part of its healthcare financing strategy still depends on approval from the federal government.
Earlier this year, Gov. Newsom acknowledged that negotiations with the Trump administration could prove challenging. State officials have said that if federal regulators reject California’s revised tax structure, the budget could face a multibillion-dollar funding gap over the coming years.
H.D. Palmer, spokesperson for the California Department of Finance, said the changes were made specifically to comply with new federal law and expressed confidence that the proposal would ultimately receive approval.
A spokesperson for the White House declined to indicate whether the administration would approve the plan, saying the application would undergo a formal review.
Debate Over California’s Fiscal Outlook
The budget drew sharply different reactions from Democratic and Republican lawmakers.
Democrats described the spending plan as an effort to strengthen California’s social safety net amid anticipated reductions in federal healthcare and food assistance. Sen. Lola Smallwood-Cuevas argued that the state has a responsibility to protect working families affected by shifting federal priorities.
Republicans, meanwhile, questioned the state’s long-term spending trajectory. Sen. Shannon Grove argued that California continues to spend beyond sustainable revenue levels, pointing to future structural deficits identified by the Legislative Analyst’s Office.
While the nonpartisan office projects ongoing deficits, it also estimates that the newly approved budget significantly reduces the size of those projected shortfalls.
For Newsom, the budget serves as a defining milestone at the conclusion of his governorship. He described the package as the result of years of fiscal discipline, emphasizing investments in healthcare, education, housing, infrastructure, and economic resilience while highlighting California’s strengthened financial position.
