Special Notice / Hearing: None__
Vote Required: Majority
To: Honorable Board of Supervisors
From: Michael P. Callagy, County Executive
Connie Juarez-Diroll, Chief Legislative Officer
Subject: State and Federal Legislative and Budget Update #5
RECOMMENDATION:
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Accept the August 2025 informational report on the 2025-26 state and federal legislative and budget updates.
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BACKGROUND:
On June 27, the State Legislature passed, and the Governor signed an updated $321.1 billion FY 2025-26 fiscal year state spending plan. The agreement addresses a $12 billion shortfall by relying heavily on state savings, special fund borrowings, and payment delays. It also rejects and modifies many of the Governor’s proposed budget solutions and aligns more closely with the Legislature’s budget blueprint by prioritizing funding for children and public schools, protecting access to health care for vulnerable populations, and cutting red tape to build more affordable housing much faster. The Governor’s approval of the state budget, however, was contingent on the enactment of either AB 131 or SB 131, which facilitates increased housing production for infill sites in urban areas by providing exemptions to California Environmental Quality Act (CEQA) procedures. SB 131 was passed and signed on June 30, therefore making the budget act officially operative at that time. Although the State Legislature delivered a balanced and timely budget under challenging fiscal conditions, the agreement did not account for the impacts and budgetary decisions (H.R. 1) subsequently made by Congress on July 4. The prospects of a special session in the fall are unlikely; the Governor and State Legislature are continuing to engage in budget negotiations and have until the end of the session to make necessary adjustments through budget trailer bills.
Before adjourning for summer recess on July 18, members of the legislature worked diligently to hear and report bills out of their respective policy committees. The Senate and Assembly Appropriations Committees will hold their “Suspense File” hearings on or before August 29, which will determine the fate of numerous bills with high fiscal impacts on the state. The Legislature will reconvene from summer recess on August 18 to enter the final stretch of the 2025 legislative session and finish their work. Both houses must pass bills by September 12, 2025, and the Governor will have until October 12, 2025, to sign or veto measures sent to his desk.
At the federal level, President Donald J. Trump signed H.R. 1, the One Big Beautiful Bill Act (OBBA), into law on July 4, 2025, marking a major legislative victory for the White House and congressional Republicans. Structured as a budget reconciliation package to circumvent traditional filibuster requirements, the bill includes several major tax provisions, including the extension of several expiring tax cuts. The legislation also directs hundreds of billions of dollars towards new investments in border enforcement and makes significant reductions to social safety net programs. Clean energy provisions authorized under the Inflation Reduction Act (IRA) were scaled back.
On July 14, 2025, the U.S. Department of Health and Human Services (HHS), along with the Department of Agriculture (USDA), Department of Labor (DOL), and the Department of Education (ED), announced new immigration-related restrictions on a range of federally funded programs.
In July, both the House and Senate continued to advance FY 2026 appropriations bills.
DISCUSSION:
2025-26 State Budget Agreement Update
The following sections cover key features of the 2025-26 State Budget Agreement and highlight budgetary actions of importance to San Mateo County. Additional information on specific department impacts, as well as differences between the various budget iterations, can be found in the attached and detailed budget table.
FY 2023-24 Vehicle License Fee (VLF) Shortfall
The budget act did not include full reimbursement of the $114,340,340 million in FY 23-24 VLF backfill owed to the County and its twenty cities. Instead, the jurisdictions will only receive $76,572,000 countywide.
Health
• Enrollment Freeze for Full-Scope (State-Only) Medi-Cal Expansion for Adults 19 Years and Older - Freezes enrollment for full-scope (state-only) Medi-Cal for undocumented individuals ages 19 years and older, beginning January 1, 2026. Undocumented individuals already enrolled in Medi-Cal cannot age out of the program; the freeze also includes a three-month grace period to allow for re-enrollment if one loses coverage.
Ø It is estimated that San Mateo County now has at least 20,000 UIS county residents enrolled in Full Scope Medi-Cal due to new enrollments since January 2024. With the suspension of Medi-Cal enrollment for new UIS county residents on January 1, 2026, County Health will need to assess the impact on the Access and Care for Everyone (ACE) program and determine whether any adjustments to program design or eligibility would be required. The freeze on Medi-Cal enrollment for the UIS population, combined with any changes in ACE program design or eligibility, could lead to an increase in demand for ACE. That potential increase in ACE demand may be partially offset by a reluctance to enroll in government programs.
• Medi-Cal Premiums for Adults with Unsatisfactory Immigration Status - Establishes a $30 monthly Medi-Cal premium for individuals ages 19 to 59 with UIS, effective July 1, 2027 (exemption for pregnant women).
Ø This is lower than the $100 monthly premium proposed initially in the May Revise; however, this new requirement will still make it more difficult for county residents to remain on Medi-Cal, as these individuals make zero to little income.
• Prospective Payment System (PPS) Payments to Federally Qualified Health Centers (FQHCs) and Rural Health Clinics (RHCs) for UIS - Eliminates PPS rates for state-only-funded services provided to individuals with UIS, as soon as July 1, 2026. The PPS adjusts for geographic differences in the cost of services based on the delivery site where the services are provided.
Ø Elimination of PPS rates means that services will be reimbursed at the applicable Medi-Cal Fee Schedule rate in the fee-for-service delivery system and the applicable negotiated rate between a Medi-Cal managed care plan and FQHC/RHC in the managed care delivery system.
• State-Only Long-Term Care Benefits and In-Home Supportive Services (IHSS) for Adults 19 and Older with UIS - The final budget does not include the Governor’s May Revision proposal to eliminate long-term care benefits and IHSS for adults with UIS.
• State-Only Dental Benefits Elimination for Adults 19 and Older with UIS -Eliminates full-scope, state-only dental coverage for Medi-Cal members ages 19 and older with UIS, beginning July 1, 2026.
Ø Elimination of dental benefits is estimated to reduce operating revenue by $2 million for the County. The County’s ACE program does not cover non-emergency dental visits, which means neither ACE participants nor the remaining Medi-Cal full-scope expansion population will have access to non-emergency dental coverage.
• Medi-Cal Asset Limit - Restores the Medi-Cal asset limit to $130,000 for individuals, plus an added $65,000 for each additional household member, beginning January 1, 2026.
• Managed Care Organization (MCO) Provider Tax - Includes $1.3 billion in General Fund savings in 2025-26 and $264 million in 2026-27 from Proposition 35. The final budget reflects $804 million in 2024-25, $2.8 billion in 2025-26, and $2.4 billion in 2026-27 for the MCO tax and Proposition 35 expenditure plan. This includes $1.6 billion across 2025-26 and 2026-27 to support increases in managed care base rates relative to Calendar Year 2024 for primary care, specialty care, ground emergency medical transportation, and hospital outpatient procedures.
Human Services
• Rejects proposals to cap IHSS provider hours for overtime at 50 hours per week.
• Rejects elimination of IHSS benefits for those who are eligible for Medi-Cal through the expansion regardless of immigration status.
• Rejects conforming the IHSS Residual Program to the timing of Medi-Cal coverage.
• Modifies IHSS late penalties - Requires the state and counties to split the cost of these penalties in 2025-26, and for counties to pay the full cost starting in 2026-27.
Ø County Health is awaiting additional guidance from the State regarding the implementation of the community first choice option late penalty and a plan to include a September Revision item to secure budget authority for the anticipated costs.
• Keeps the May Revision proposal to streamline the California Work Opportunity and Responsibility to Kids (CalWORKs) program - Expands allowable welfare-to-work (WTW) activities, reassesses mandatory activities, simplifies curing of sanctions, and eliminates CalWORKs RADEP and E2Lite.
Housing & Homelessness
• Homeless Housing, Assistance and Prevention (HHAP) Program - No funding provided to HHAP in FY 2025-26 but includes a $500 million appropriation for HHAP intended for FY 2026-27 (several conditions must be met before funding is allocated and disbursed).
Ø The addition of future HHAP rounds in the adopted budget means that HHAP funding for housing system activities will continue to be available to San Mateo County into FY 2026-27.
• Encampment Resolution Funding - Provides $100 million for Encampment Resolution Funding for grants to local jurisdictions to address encampments and transition individuals into permanent housing ($50 million is reserved for projects on state rights-of-way).
• Support for New Housing Projects - Provides $500 million for Low-Income Housing Tax Credits and $120 million in funding for the Multi-Family Housing Program.
Ø San Mateo County has several affordable housing projects in the pipeline that could benefit from this funding if selected.
• New Housing and Homelessness Agency - Approves reorganization plan to split the Business, Consumer Services, and Housing Agency into two separate agencies, (1) Housing and Homelessness Agency, and (2) Business and Consumer Services Agency.
Additional Items of Interest to the County:
• Proposition 36 - Provides $100 million in one-time funding; $50 million is earmarked explicitly for county implementation of Proposition 36.
Ø Absent additional funding, there is uncertainty around successful implementation as this funding does not fully meet county department needs.
• Forestry and Fire Protection County Coordinator Program - Includes $9.5 million General Fund to CAL FIRE for local assistance to the Wildfire County Coordinator Program through the California Fire Safe Council.
Ø These local positions increase counties’ capacities for wildfire prevention and community safety efforts, leveraging millions of dollars of funding through a partnership between the county and state agencies.
• Climate Bond - Includes fund shifts around $300 million from the 2024 Climate Bond (Proposition 4, 2024) to the General Fund for costs related to natural resources and environmental protection. While the final budget agreement rejects the Governor’s proposed spending plan for Proposition 4, the Legislature is expected to finalize future expenditures by the end of the session.
State Legislative Update
With a vast majority of bills parked in the Senate and Assembly Appropriations Committees, below are a few measures gaining attention as the Legislature makes its final sprint to the finish line.
Brown Act
• SB 707 (Durazo-D) would, until January 1, 2030, require an eligible legislative body to comply with additional meeting requirements, including that, all open and public meetings include an opportunity for members of the public to attend via a 2-way telephonic service or a 2-way audiovisual platform, and that the eligible legislative body take specified actions to encourage residents to participate in public meetings, among other provisions.
Immigration
• SB 805 (Perez-D) would require federal, state, and local law enforcement personnel operating in California to display identification to the public when performing their duties visibly, and makes a violation of this requirement a misdemeanor, among other changes.
• AB 49 (Muratsuchi-D) would prohibit school officials and employees of a local educational agency from allowing an immigration authority to enter a nonpublic area of a school site for any purpose without being presented with a valid judicial warrant or a court order.
• AB 1136 (Ortega-D) would provide job protections to workers who are detained or need to take time off from work to resolve immigration matters.
Artificial Intelligence and Privacy
• SB 7 (McNerney-D) would require an employer to provide a written notice that an automated decision system (ADS), for the purpose of making employment-related decisions, not including hiring, is in use at the workplace to all workers that will foreseeably be directly affected by the ADS.
• AB 1331 (Elhawary-D) would regulate the use of workplace surveillance tools, as broadly defined, by both public and private employers.
Federal Update
The following are some of the key provisions of the OBBA impacting counties, including direct-to-client impact. Where available, anticipated statewide impacts are noted:
Healthcare and Public Healthcare Initiatives
Medicaid/CHIP
• Work Requirements - Able-bodied adults must affirm monthly that they spend no less than 80 hours per month working, participating in a work program, completing community service, participating in an educational program, or participating in a combination of those activities. Exceptions are made for specific individuals, including those under 19 years of age and persons experiencing certain short-term hardship events. Effective January 1, 2027.
Ø An estimated up to 3 million Medi-Cal members may lose coverage, which will significantly drive up the uninsured rate and raise costs for hospitals and clinics treating uninsured patients.
• Eligibility Redeterminations - To be conducted every six months, starting January 1, 2027.
Ø An estimated 40,000 Medi-Cal members may lose coverage, which will drive up the uninsured rate and raise costs for hospitals and clinics treating uninsured patients.
• Retroactive Coverage - Shortens Medicaid retroactive coverage from three months to one month for expansion adults and two months for all other Medicaid applicants. This provision also allows states to provide two months of CHIP retroactive coverage. Effective January 1, 2027.
Ø An estimated 86,000 Medi-Cal members statewide per year would be affected by this policy and receive 1 month of retroactive coverage, rather than 3 months.
• Cost Sharing - Requires states to impose cost sharing for services provided to Medicaid expansion adults with income above 100% or the FPL ($15,560 per year). States would decide the amount, not exceeding $35 per service, and subject to an aggregate limit of 5% of family income. Effective October 1, 2028.
Ø The cost-sharing requirement will limit access (e.g., due to members delaying or forgoing care, confusion about new requirements) among the Medicaid expansion population. Providers will likely see an increase in uncompensated care.
• Provider Tax Limitations - Prohibits any new Medicaid provider tax or increase to existing tax rates (both for local- and state-imposed taxes). Prohibits any tax that either (1) imposes a lower tax rate on providers explicitly defined based on their lower Medicaid volumes compared to those providers with higher Medicaid volumes, or (2) taxes Medicaid units of service (e.g., discharges, bed days, revenue, or member months) at a higher rate than on-Medicaid units of service. Also prohibits taxes that have the “same effect” as in (1) and (2) above. Modifies the provider tax cap by reducing the 6% tax threshold by half a percentage point annually until it reaches 3.5%. Effective date - Moratorium immediately; phase down beginning October 1, 2027.
Ø California’s current MCO tax structure is non-compliant under these new parameters and will need to be modified to align with the new federal standards. The new constraints jeopardize other major provider taxes, including the Hospital Quality Assurance Fee, threatening revenue streams. In the future, these limitations may undermine the state’s longstanding strategy to finance the non-federal share of Medi-Cal.
• State Directed Payment Restrictions - Caps any future SDP at 100% of Medicare payment levels. Requires payments with existing SDPs above Medicare rates to be reduced to 10 percentage points per year until the SDPs are no greater than 100% of Medicare payment levels. Effective - Immediately for new SDPs; reduction in existing SDPs starting January 1, 2028.
Ø Limits the state’s ability to use SDPs to increase provider payment rates above Medicare levels, which may reduce provider participation and access to Medicaid.
Ø Constrains the state’s ability to raise the non-federal share of Medicaid funding, potentially pressuring other areas of the budget.
Ø Limits future SDP increases, including for public hospitals, which have inpatient and/or outpatient rates exceeding Medicare.
• Federal Funding Repayment Penalties - Eliminates CMS’s ability to waive federal penalties associated with improper payments related to eligibility, even when states are making a good faith effort to address them. CMS is also required to issue disallowances upon identifying improper payments under federal audits beyond Payment Error Rate Measurement (PERM), as well as, at the option of the Secretary, state audits. Effective - October 1, 2029.
Ø CMS may claw back federal funds from California, even if the state is implementing a corrective action plan to reduce errors, increasing financial risk.
• Reduction in FMAP for Emergency Medi-Cal - Prohibits states from receiving the 90% enhanced matching rate for emergency services provided to individuals who, but for their immigration status, would have qualified for the ACA optional adult expansion group. Also applies to emergency care provided to refugees, asylees, and other lawfully residing individuals. Effective - October 1, 2026.
Ø California will lose the 90 percent federal match for emergency Medicaid services, requiring increased General Fund spending and/or a rollback of services covered under the emergency Medicaid benefit.
Ø May increase financial pressure on safety-net providers, particularly hospitals that deliver high volumes of emergency care to noncitizens.
• Restrictions on Lawful Immigrant Eligibility for Medi-Cal - Ends the availability of full-scope federal Medicaid and CHIP funding for most refugees, asylees, victims of human trafficking, specific individuals whose deportation is being withheld or who were granted conditional entry, or individuals who received humanitarian parole. Effective - October 1, 2026
Ø Approximately 200,000 immigrant Medi-Cal members will shift from satisfactory immigration status (SIS), which is eligible for full Federal Financial Participation (FFP), to unsatisfactory immigration status (UIS), which is only eligible for emergency and pregnancy-related FFP.
• Limits Payments to “Prohibited Entities” - Bars Medicaid participation by certain providers of abortion services, including Planned Parenthood, for the one-year period following enactment (through July 2026). Effective - immediately
Ø Note - On July 7, a federal judge in Boston issued a temporary restraining order that blocks the Trump Administration from implementing this provision nationwide for 14 days.
Ø In California, roughly 80 percent of Planned Parenthood patients rely on Medi-Cal, meaning this proposal would effectively strip $305 million in federal funding from one of the state’s largest providers of reproductive health care.
Ø Loss of federal Medicaid funding may force Planned Parenthood to reduce services, limit appointments, or close centers.
Ø In San Mateo County, Planned Parenthood Mar Monte clinics in San Mateo and South San Francisco were closed.
Agricultural Supports
• Able-Bodied Adults Without Dependents Work Requirements - Work requirements for this population of adults without dependents will now apply to those up to age 64 (previously 18-54). They will also apply to adults with dependents over the age of 14. Effective upon enactment, with implementation pending federal guidance.
o State estimates are that 303,000 individuals are at risk of losing eligibility.
o $499.1 million in federal funds will be lost annually.
• Noncitizen Eligibility for CalFresh - Noncitizen eligibility will now be limited to Lawfully Permanent Residents (LPR), Cuban or Haitian entrants, and individuals who reside in the U.S. in accordance with a Compact of Free Association (COFA) agreement. Effective upon enactment, with implementation pending federal guidance.
o An estimated 73,900 noncitizens will lose eligibility.
o This equates to a loss of $133 million in federal funding annually.
• Limitation of Standard Utility Allowances (SUA) Based on Receipt of Energy Assistance - Limits the automatic application of the $20.01 Low Income Home Energy Assistance Program (LIHEAP), known as the Standard Utility Allowance Subsidy (SUAS), to households with elderly or disabled members. Effective upon enactment, with implementation pending federal guidance.
o An estimated 185,000 CalFresh households (444,000 individuals) will see their benefits reduced.
o An estimated 15,000 households (18,000 individuals) will lose eligibility.
o This equates to a loss of $183 million in federal funding.
• Re-Evaluation of the Thrifty Food Plan - The Thrifty Food Plan (TFP) is used to determine the maximum SNAP benefit allotment by household size. The benefit allotments for households with 9+ members are capped. The cap is equivalent to 200% of the TFP for a household of four. Adjustments to the TFP must be cost-neutral.
o Limits benefits increase due to changes in dietary guidelines or rising food costs.
o An estimated 43,000 individuals (in 9+ households will be affected).
o The household changes equate to an estimated annual loss of $11.6 million.
• Administrative Cost Sharing - Reduces the federal cost share of administering SNAP from 50 percent to 25 percent, effectively increasing state cost-sharing requirements by 25 percent. Under State statute, the state share is split between the State (70%) and counties (30%), and this will not change. Effective - October 1, 2026.
o 685.2 million in additional costs to the State ($474.2 million in State General Fund and $211 million in County Funds)
• Funding Match Requirements Based on Payment Error Rates - Requires states to contribute a percentage of the cost of SNAP benefits based on their payment error rate. In the first year of implementation, FY 2028, the state may use either its FY 2025 or FY 2026 error rate, but in subsequent years beginning in FY 29, the state must use the error rate calculated using the payment error rate that is three fiscal years prior. Effective - October 1, 2027.
o States with a payment error rate below 6 percent would pay zero percent of SNAP benefit costs.
o States with a payment error rate between 6 and 8 percent would pay a 5 percent share.
o States with a payment error rate between 8 and 10 percent would pay a 10 percent share.
o States with a payment error rate equal to or greater than 10 percent would pay a 15 percent share.
Before OBBA, SNAP benefits were 100 % federally funded. Now, state agencies must pay a percentage of CalFresh benefit allotments on a sliding scale if they have a Payment Error Rate (PER) above 6%.
Tax Reforms
• State and Local Tax (SALT) Deductions - Raises the state and local tax deduction cap to $40,000 for 2025 for individuals and joint filers making less than $500,000 per year in modified adjusted gross income (MAGI) for the next five years.
• Child Tax Credit - Permanently expands the child tax credit from the current $2,000 level to $2,200. However, the bill requires both parents and all children to be U.S. citizens and have a Social Security number. It does not address the credit’s phase-in, preventing over 17 million children from low-income families from receiving the full credit.
Federal Agencies Tighten Immigration Rules for Access to Public Benefits
The agencies are updating their interpretation of the 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), which is a law that limits eligibility for “federal public benefits” to U.S. citizens and a narrow group of “qualified” immigrants.
For nearly three decades, federal agencies have exercised discretion in how they classify specific programs under PRWORA, allowing broader access-particularly for non-citizens, including undocumented persons. However, under the new guidance, discretion is being rolled back. The updated interpretation will newly classify many programs as “federal public benefits,” triggering citizenship and immigration verification requirements and restricting access for non-citizens, including individuals who were previously eligible.
It should be noted that PRWORA’s restrictions already apply to major programs such as Medicaid (Medi-Cal), the Supplemental Nutrition Assistance Program (SNAP/CalFresh), the Temporary Assistance for Needy Families (TANF/CalWORKs), HUD rental assistance, and Supplemental Security Income (SSI). The law generally bars non-citizens from receiving benefits under these programs and imposes a five-year waiting period for lawful permanent residents, with limited exceptions.
The new policy extends similar restrictions to a broader array of programs. Some grantees may now be required to screen for or verify immigration status as a condition of eligibility for affected services, though additional guidance is needed to inform implementation.
Fiscal Year 2026 Appropriations Update
The House Appropriations Committee has released the text of 11 of its 12 appropriations bills, with nine reported out of the Committee and two passing on the House floor. The House has now departed for the August recess.
Meanwhile, the Senate Appropriations Committee is working to finalize a “minibus” package of 2026 appropriations bills. The legislation would combine three widely supported spending measures, including Military Construction-Veterans Affairs, Agriculture, and Commerce-Justice-Science. Lawmakers are also debating whether to add the Legislative Branch spending bill, though internal divisions remain. The Senate is now out for the annual August recess.
With limited legislative days remaining before the September 30 deadline, leaders in both chambers have acknowledged the likely need for a continuing resolution to extend current funding levels past the start of the fiscal year.