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: FY 2026-27 May Revision - State Budget Update
RECOMMENDATION:
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Accept the June 2026 informational report on the FY 2026-27 May Revision.
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BACKGROUND:
On May 14, 2026, Governor Newsom released his final revised budget proposal for the 2026-27 state fiscal year. The plan includes $246.56 billion in General Fund spending, an $18.6 billion increase over last year's enacted budget. According to the Governor, the proposal eliminates the state’s projected deficit through July 2028 while maintaining strong reserves and protecting core public services amid continued economic uncertainty. The May Revision includes a $1.8 billion reduction in General Fund spending, avoids major new ongoing expenditures, and sets aside surplus funds to support the 2027-28 budget and improve the state’s long-term fiscal stability.
Overall, the May Revision projects slower short-term economic growth for both California and the U.S., driven by global instability and uncertainty around federal trade, immigration, and monetary policies. International conflict and rising energy prices continue to cloud the state’s economic outlook. However, longer-term growth is expected to improve as economic pressures ease and AI-driven productivity increases.
As for state reserves, the Budget Stabilization Account (BSA) balance (commonly known as the Rainy-Day Fund) for 2026-27 is $15.1 billion. In addition to the BSA, the May Revision includes $4.5 billion in the Special Fund for Economic Uncertainties and $10.3 billion in the Public School System Stabilization Account, bringing combined reserves in 2026-27 to nearly $29.9 billion. The Administration intends to continue discussions with the Legislature on Proposition 2 reform to allow the state to build additional savings during periods of significant revenue growth, better positioning the state to mitigate future revenue volatility and avoid significant reductions to core programs.
DISCUSSION:
May Revision
Revenue
Although revenue projections continue to improve, the Administration is proposing $3.6 billion in revenue solutions for 2026-27, increasing to $5.1 billion in 2027-28, and then decreasing slightly to $4.4 billion in 2029-30 to balance the budget for the next two fiscal years and address the State’s ongoing structural deficits. The proposals include:
• Permanent Credit Limitation for Businesses. Beginning in 2027, permanently limiting business credit use to $5 million or 50 percent of tax liability, whichever is greater, increasing revenues by $850 million in 2026-27, growing to $1.8 billion in 2029-30.
Ø No County impacts have been identified.
• Digital Prewritten Software Tax. Proposes the State’s first sales and use tax on an intangible good, resulting in state General Fund revenues of $450 million in 2026-27 and $900 million in 2027- 28 and annually thereafter. This proposal would also increase local sales tax revenues for counties and cities by $560 million in 2026-27 and $1.1 billion in 2027-28 and annually thereafter.
Ø The Administration is suggesting that counties use local sales tax revenues to address the impacts of H.R. 1; however, most sales and use tax revenue is not a general-purpose, discretionary revenue source, and some local sales tax revenue is allocated to both counties and cities. The California State Association of Counties (CSAC) notes that the funding under this proposal is NOT sufficient to mitigate the fiscal impacts of H.R.1.
• 2027 Managed Care Organization (MCO) Tax. Proposes to revise and extend the MCO Tax due to new requirements of H.R. 1, effective January 1, 2027. This would result in increased revenues of $575 million in 2026-27, $2.3 billion each in 2027- 28 and 2028-29, and $1.7 billion in 2029-30. Tax revenues would support Medi-Cal and increase payments to hospitals, clinics, behavioral health providers, and other health care services.
Ø The impact on San Mateo Medical Center (SMMC) will depend on how changes to the MCO tax impact the Proposition 35 spending plan. This spending plan dictates how California invests tax revenues collected from MCOs into the Medi-Cal system. Currently, the plan includes an estimated $175 million for public hospitals for calendar years 2025 (not yet distributed) and 2026. In addition, changes to the targeted provider rate (TRI) increases could have a spillover effect on the Unsatisfactory Immigration Status (UIS) population's transition from Medi-Cal managed care to Medi-Cal fee-for-service. When the UIS population moves from managed care to fee-for-service, claims for TRI-covered services will be paid at the new TRI Fee Schedule rate rather than the prior managed care rate. This change could result in higher reimbursement for providers if the TRI rate exceeds the prior managed care payment, or lower reimbursement if it is below the prior managed care rate. Further details are needed to assess the full impact on SMMC.
Spending Reductions and Reforms
The May Revision proposes $411 million in total spending reductions and other reforms in 2026-27, growing to $711.9 million by 2029-30. Notable proposals include:
• Medi-Cal Asset Test Limits. Refer to the health section for discussion ($278.3 million in 2026-27, growing to $495.6 million in 2029-30).
• Increase Monthly Premium for Adults with Unsatisfactory Immigration Status to $50 (Ages 19-59). Refer to the health section for discussion ($427.3 million in 2027-28, decreasing to $314.3 million in 2029-30).
FY 2026-27 Priority County Budget Requests
Vehicle License Fee (VLF) Shortfall
The May Revision, like the Governor’s January Budget, fails to include San Mateo County’s and 20 cities’ $119,238,751 VLF shortfall for FY 24-25 and an unpaid $37,750,993 shortfall from FY 23-24.
On June 1, 2026, the California State Assembly released its budget plan, which notes that they aim “to fairly address this [VLF] issue through discussions with the Senate, the Administration, and the County of San Mateo.”
Securing these critical funds is the County’s top state budget priority, as they are vital for providing essential services to the County. The Board’s VLF subcommittee and County Executive staff will continue to engage with all relevant stakeholders and strenuously advocate for these funds throughout the session.
Mitigating H.R.1 Impacts
San Mateo County joined a coalition led by CSAC to urge state leaders to support a multiyear H.R. 1 budget request focused on the following priorities:
Ø County Indigent Care
o $761 million in 2026-27 and $2.4 billion in 2027-28 and ongoing - Funds state-mandated, subsistence level care for the estimated 33% of individuals who will lose Medi-Cal coverage, seek this care, and be eligible.
Ø Public Hospital Systems
o $500 million in 2026-27 and $850 million in 2027-28 and ongoing - Stabilizes public hospital system revenues and protects patient care.
Ø County Eligibility
o $373 million in 2026-27 and $402 million in 2027-28 and ongoing - Funds implementation of new eligibility requirements for Medi-Cal and CalFresh and robust screening and supports to maximize the number of individuals who can retain coverage and assistance.
Ø County Behavioral Health
o $224 million in 2026-27 and $828 million in 2027-28 and ongoing - Funds behavioral health services for individuals who will lose Medi-Cal coverage and seek services from counties.
Regrettably, the Governor’s May Revision only proposes to fund five percent of the statewide budget request and less than half a percent of what is needed next year. The table below provides an overview of the original CSAC budget request, the funding included in the May Revision by category, and the coalition’s updated budget request reflected in the far-right column.
In response to the lack of funding provided in the Governor’s May Revision, CSAC and its county affiliates quickly pivoted to modify the budget request to help ensure counties receive adequate support. County partners are now proposing an alternative solution-a 2-year pilot program, Protect Access to Healthcare (PATH), to provide emergency Medi-Cal coverage for individuals who could lose eligibility under the new federal work requirements. PATH would help mitigate the fiscal strain on counties from rising uninsured populations while keeping individuals connected to coverage and improving their ability to return to full-scope Medi-Cal. The proposal would also provide counties with additional time to assess the long-term impacts of H.R. 1 and identify sustainable, long-term solutions.
Department Analysis of the May Revision
The sections below summarize other key features of the Governor’s revised budget proposal and highlight budgetary actions of importance to San Mateo County. Additional details on departmental impacts are provided in the attached summary table.
Health
The following is a list of the most critical H.R. 1-related funding proposals included in the May Revision:
• Medi-Cal County Administration. A one-time augmentation of $57 million General Fund in 2026-27 to assist with county implementation of the work and community engagement requirements required by H.R. 1. The proposal also outlines a potential state surge in staffing capacity that would be available as an option to assist counties with increased workload funded at $16.7 million General Fund in 2026-27, 2027-28, and 2028-29.
Ø Approximately 56,700 San Mateo County Medi-Cal beneficiaries may be impacted by the implementation of six-month eligibility redeterminations and work requirements beginning in April 2026. These changes are expected to increase county administrative and eligibility workloads related to Medi-Cal case processing, renewals, and compliance activities. While the State proposes partial funding to support implementation, available one-time funding is not expected to fully offset the estimated ongoing staffing, workload, and operational costs associated with Medi-Cal eligibility and compliance changes.
• Transition of Individuals with Unsatisfactory Immigration Status to Fee-for-Service. Moving Medi-Cal members with unsatisfactory immigration status from managed care plans to the fee-for-service delivery system effective January 1, 2027.
Ø For San Mateo County, this proposal will likely lead to Medi-Cal members transitioning from the Health Plan of San Mateo (HPSM) and Kaiser Medi-Cal Managed Care Plan to the Medi-Cal Fee for Service delivery system. San Mateo County Health is currently updating its projections; however, the Health Plan of San Mateo estimates that there are approximately 40,000 UIS in San Mateo County, with approximately half seeking care at San Mateo Medical Center (SMMC). This is a significant concern for the County’s Health System, as it would likely result in reduced access to care for UIS Medi-Cal beneficiaries and lower reimbursement for SMMC. Additional details are needed to determine the impact on SMMC. At a minimum, the shift from HPSM payment rates to fee-for-service only is expected to reduce revenue by $1.9M in FY 26-27.
• Increased Monthly Premium for Adults with Unsatisfactory Immigration Status. Increasing monthly premiums for adults with unsatisfactory immigration status from $30 to $50, effective July 1, 2027.
Ø This proposal may result in some county residents losing Medi-Cal coverage because they cannot afford the required monthly premiums. As a result, affected individuals could lose access to Full Scope Medi-Cal benefits and become eligible for local financial assistance programs, including Access and Care for Everyone (ACE). This change is expected to increase administrative, prescription, and medical service costs for services received outside of SMMC, as well as unreimbursed costs for services provided by SMMC.
• Medi-Cal Asset Test Limits. Reinstating the Medi-Cal asset limit for seniors and disabled adults to $2,000 for an individual or $3,000 for a couple, effective no sooner than January 1, 2027. The Department of Healthcare Services indicates that 25,000 people will lose access to Medi-Cal in 2026-27, growing to 37,000 in 2027-28.
Ø This proposal will result in residents losing their Medi-Cal coverage, including those with Share of Cost Medi-Cal. The exact number of affected individuals in San Mateo County is currently unknown.
• Hospitals in Immediate Financial Distress. Allowing for an augmentation of up to $50 million General Fund in 2026-27 for the Department of Health Care Access and Information to provide short-term support for hospitals in immediate and significant financial distress.
Ø The May Revision, however, does NOT include funding for the public hospital system, of which SMCC is a part.
Lastly, although not a new proposal, the Governor’s budget retains the planned elimination of reimbursement at Prospective Payment System (PPS) per-visit rates for state-only services provided by Federally Qualified Health Centers (FQHCs), beginning July 1, 2026. The Senate’s proposed budget plan suggests delaying these cuts until January 1, 2028. This provision alone represents $14M of the Health System’s estimated $24.9M impacts for FY 26-27. Delaying the implementation of this provision is the department's highest priority in the State budget.
Human Services
The Governor’s May Revision proposes to continue three January budget proposals to achieve savings in the In-Home Supportive Services (IHSS) program. These include (1) eliminating the IHSS Back-Up Provider Program, which provides recipients with temporary, emergency replacement caregivers when their primary provider is unavailable, (2) eliminating the state’s responsibility for covering increases in IHSS service hours per case, thereby shifting those costs to counties, and (3) aligning IHSS eligibility timelines with Medi-Cal by terminating IHSS services for individuals who lose Medi-Cal eligibility.
CSAC remains strongly opposed to the cost-shift proposal referenced above, as it would shift an estimated $233.6 million in IHSS costs from the state to counties, negatively impacting the IHSS program and the broader health and human services programs that counties administer on behalf of the state. Additional items of interest in the revised budget include:
• IHSS Collective Bargaining. Proposed trailer bill language would impose a financial penalty on counties beginning October 1, 2026, under certain circumstances. Specifically, if a fact-finding report is issued prior to June 30, 2026, the county would have 90 days to reach a labor agreement with the IHSS provider union. If the county fails to reach an agreement within that period, then the penalty would be applied regardless of whether the county’s labor agreement (MOU) has already expired.
Ø County impact is currently unknown.
• CalFresh County Administration. Includes a one-time augmentation of $30 million General Fund in 2026-27 to help counties with the implementation of the expanded work requirements for Able-Bodied Adults Without Dependents (ABAWDs) required by H.R. 1.
Ø According to San Mateo County’s Human Services Agency (SMC-HSA), approximately 5,318 San Mateo County residents may be required to meet ABAWD work requirements to maintain CalFresh eligibility as of June 2026. These changes are expected to increase workload, call volume, office visits, and client assistance needs associated with screening, exemptions, and compliance requirements. Based on the County’s estimated share of the one-time $30 million General Fund augmentation for ABAWD administration, San Mateo County could receive approximately $157,000 in one-time funding in FY 2026-27.
• Adult Protective Services (APS). Proposes to revert the expansion of Adult Protective Services adopted in 2021-22, including changing the age of eligibility from 60 back to 65. This program serves older and dependent adults when there are reports of abuse and neglect.
Ø Locally, the elimination of funding on June 30, 2026, represents a loss of $721,000 per fiscal year, which funds approximately 4 Full-Time Equivalents (FTEs). While clients under 65 currently make up approximately 10% of the APS caseload, the four FTEs funded through the APS expansion were not solely dedicated to that age group. The direct workload generated by the 60-64 population equates to roughly one FTE; however, overall APS caseloads and referrals have grown by more than 50% since the inception of the funding in 2021, absorbing the remaining three FTEs across the broader program, and even then, staffing remains insufficient to meet demand.
• CalFood. Includes an increase of $30 million in the one-time General Fund for food banks in 2026-27.
Ø No County impacts have been identified
• Immigration Services. Includes an increase of $20 million in the one-time General Fund to support legal strategies that increase legal aid groups’ capacity to help Californians who are facing immigration court proceedings, particularly for individuals in civil immigration detention.
Ø No County impacts have been identified
Housing and Homelessness
The May Revision continues to prioritize the Governor’s reorganization proposal, including the establishment of the new California Housing and Homelessness Agency (CHHA). The updated spending plan does not address the two $10 billion general obligation bond measures for affordable housing that remain under consideration in the Legislature, AB 735 (Wicks) and SB 417 (Cabaldon), which the County supports. In addition to the proposed trailer bill language on the Housing and Homelessness Assistance Program (HHAP) mentioned below, the Administration is proposing trailer bill language on local government development impact fees and on funding for competitive state housing programs.
• Local Impact Fees. Proposed trailer bill language would incentivize local governments to waive development impact fees for projects seeking competitive state affordable housing funding administered by the CHHA, including the Housing Development and Finance Committee, the Department of Housing and Community Development, and the California Housing Finance Agency. Elements of the proposals include:
Ø Incentive Route: Allow project applicants to count any development fees deferred, reduced, or waived by a county as a local funding match, although it does not guarantee the project will receive funding.
Ø Prohibition Route: Require counties to waive development fees for projects in which they serve as the applicant or co-applicant for a state housing grant.
The County’s Department of Planning and Building does not anticipate any impacts as the Department already waives all permit fees for affordable housing projects.
• Homeless Housing, Assistance and Prevention (HHAP). Maintains $500 million for a seventh round of the HHAP program in 2026-27, contingent on enhanced accountability and performance requirements.
Ø SMC-HSA continues to anticipate a 50% reduction in HHAP 7 funding. HSA estimates a reduction of approximately $2.5 million based on reduced statewide funding.
Transportation
The May Revision is not proposing any significant General Fund augmentations or fund shifts for transportation programs. A significant amount of transportation funding was reduced or shifted to the Cap-and-Invest program (formerly known as the Cap-and-Trade program) and other funding sources as part of last year’s budget. Nevertheless, a few notable items in the revision include:
• Homelessness and Caltrans. Includes $6.2 million General Fund annually for two years for Homeless Encampment Liaisons at Caltrans. The proposal is intended to sustain efforts addressing homelessness and encampments on state highway rights-of-way, with Caltrans continuing to coordinate with local governments, social service providers, and state agency partners to connect individuals to health, human services, and safe housing options off the highway system.
Ø County impact is currently unknown.
• Clean California. Proposes a one-time increase of $40 million in General Funds to the Clean California program, which is administered by Caltrans. The program provides grants to counties, cities, tribes, special districts, and community groups to fund clean-up projects to beautify and improve streets and roads, tribal lands, parks, pathways, and transit centers.
Ø The program includes a Local Grant Program <https://cleancalifornia.dot.ca.gov/local-grant-program> that supports beautification and litter removal efforts, which could potentially benefit the County’s stormwater initiatives. The program also funds the Caltrans Community Cleanup & Employment Pathway (CCEP) <https://cleancalifornia.dot.ca.gov/local-grant-program/ccep-grants> grant, through which the County received a $501,462 CCEP award for the Green Workforce for Clean and Sustainable Streets project.
Climate and Environment
The May Revision limits new proposals on climate and environment, except for the following:
• Beverage Container Recycling Fund. Outlines several investments from the Beverage Container Recycling Fund, including $60 million over three years for the Plastic Market Development Payment Program and $5 million annually for three years for the Plastic Reclaimers and Manufacturers Grant program to invest in new or improved plastic processing infrastructure and equipment, $100 million for the Beverage Container Quality Infrastructure Grant Program to upgrade sorting and processing infrastructure and produce cleaner, higher-quality material streams, and $50 million for the Rural Recycling Incentive Payments Program to increase access to California Redemption Value (CRV) refunds.
Ø According to the County’s Sustainability Department, these investments could strengthen domestic plastic recycling, making it more feasible for haulers in San Mateo County to collect and process additional recyclable plastics. Depending on program implementation, grant funding for sorting and processing infrastructure upgrades could also support improvements at the Shoreway and Blue Line transfer station, enhancing their capacity to sort and process recyclable materials.
Looking Ahead
As of the writing of this report, the Senate and Assembly budget subcommittees had concluded their review of the Governor’s proposal and released their plans as part of the Legislature’s budget process. The table below outlines the current spending proposals across the three budget plans.
The Senate and Assembly will continue negotiating to reconcile their differing spending plans ahead of the June 15 constitutional deadline to pass a state budget. The Intergovernmental and Public Affairs (IGPA) Unit of the County Executive’s Office will provide your Board with an update once the final budget is approved.
Comparison of County Priorties in the Budget Plans
