Next 10: Understanding California’s 2025-2026 Budget

Following large surpluses in 2021 and 2022 due to higher-than-expected revenue and federal COVID relief funds, the state is now facing a projected deficit of $19.5 billion in 2025-26 if the proposals in the Governor’s revised May budget are not adopted. Under the Legislature’s version of the budget, the deficit would rise to $21 billion. This is a result of lower-than-expected General Fund revenue, the expiration of the state and national COVID funds, and uncertainty surrounding the economy and federal policy changes. Changes in federal policy and potential funding cuts would have a significant impact on California's budget.

As part of the 2024 budget agreement, the Governor and Legislature included provisions to maintain funding for long-standing state priorities—such as healthcare, housing, homelessness, and education—while still minimizing the deficit in 2025-26. 

The budget maintains funding for key areas, such as TK-12 and higher education, while including cuts to some Health & Human Services programs to help cover the budget shortfall. Costs associated with Medi-Cal have increased by more than anticipated, so a number of proposals have been presented to reduce costs. These proposals include freezing enrollment of low-income undocumented immigrants over the age of 18 and implementing monthly premiums for the undocumented immigrants who have already enrolled in Medi-Cal since eligibility was expanded in recent years.

In the final budget, California would withdraw $7.1 billion from the Rainy Day Fund (also called the BSA) to sustain ongoing commitments — unchanged from the January and May proposed budgets. The balance of the Rainy Day Fund would be $11.2 billion at the end of the 2025-26 fiscal year.

Due to the deficit, some of the 2025-26 budget cuts include:

Key Major Spending Cuts:

Health & Human Services

Cut $86.5 million in 2025-26 by freezing enrollment in Medi-Cal for undocumented immigrants over the age of 18 beginning in January 1, 2026, with the cost savings increasing to $3.3 billion by 2028-29

Require undocumented low-income adults to pay $30 per month to keep their Medi-Cal coverage beginning in July 2027 (no impact to the 2025-26 budget), but cost savings would be $30 million in 2026-27 and $250 million by 2028-29 and $675 million ongoing thereafter

Cut $45 million in 2025-26 by reinstating asset tests which would require seniors and people with disabilities to limit their assets to $130,000 for individuals and $195,000 for couples in order to qualify for Medi-Cal beginning in January 2026 (savings would rise to $510 million ongoing in future years)

Climate Change & Resilience

Cut $1 billion in General Fund spending for Cal Fire by shifting the source of the funds to the state's Greenhouse Gas Reduction Fund (GGRF) instead

Despite the significant budget shortfall last year, the state avoided many harmful cuts to core programs. However, due to the deficit, there are relatively few proposals that would increase funding for various programs and departments. 

Key New Spending:

K-12 Education

Spend $90.7 million in additional ongoing Prop 98 funds to fully fund the universal school meals program in 2025-26

Early Childhood

Spend $2.1 billion ongoing Prop 98 for full implementation of universal Transitional Kindergarten (TK) which provides access to all 4 year-olds and to reduce the teacher-to-child ratio in every TK classroom from 12:1 to 10:1

Climate Change & Resilience

Spend $39 million in 2025-26 and $78 million ongoing to enable CalFire to employ 3,000 seasonal firefighters for the whole year instead of only for 9 months as it is now