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 2025-26 May Revision and State/Federal Budget Update
RECOMMENDATION:
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Accept the June 2025 informational report on the 2025-26 state and federal budget updates.
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BACKGROUND:
On May 14, 2025, Governor Newsom released his revised budget proposal for the 2025-26 state fiscal year. The proposal includes $321.9 billion in total expenditures, of which $226.4 billion is General Fund spending. Although the Governor noted a modest surplus of $343 million in his initial January budget proposal, the political and financial landscape has changed significantly since then. A combination of factors, including but not limited to the impact of global trade policy (tariffs), the Los Angeles wildfires (tax implications), and rising costs for critical social services, is contributing to this budgetary issue. Now, in his May Revision, Governor Newsom includes several solutions to address an estimated $12 billion budget deficit, which notably does not account for any potential federal spending cuts currently under consideration by Congress.
Despite California making significant progress in the healthcare and social services arena over the past few years, the May revision implements substantial reductions across several government operations, pausing investments and scaling back or eliminating various initiatives for currently served populations.
To close the shortfall, the Governor proposes the following budgetary strategies:
• Reductions: $5 billion in total solutions for 2025-26, primarily affecting Medi-Cal and In-Home Supportive Services (IHSS).
• Revenue/Borrowing: $5.3 billion in total solutions for 2025-26, using Proposition 35 Managed Care Organization (MCO) taxes to support Medi-Cal cost increases.
• Fund Shifts: $1.7 billion in total solutions for 2025-26 from cap-and-trade revenues to support CAL FIRE operating costs.
• Triggers: $456.1 million in commitments that would be activated in 2027-28, contingent on sufficient resources to support these commitments, including the expansion of the California Food Assistance Program to adults 55 and over, regardless of immigration status, and the implementation of a previously planned tiered rate structure for child welfare programs.
The May Revise includes a withdrawal of $7.1 billion from the Budget Stabilization Account (commonly known as the Rainy Day Fund), as initially proposed in the Governor’s January Budget. This plan maintains a prudent level of reserves to safeguard against future economic uncertainties.
On May 22, 2025, the House of Representatives passed the One Big Beautiful Bill Act (H.R. 1), a budget reconciliation bill that represents the cornerstone of President Trump and congressional Republicans’ legislative agenda, by a 215-214 vote. All Democrats opposed the bill, joined by two Republicans who cited concerns over the federal deficit. Two GOP members missed the vote, and one voted “present.” In addition, Congress used the Congressional Review Act (CRA) as a mechanism to repeal California’s vehicle emission waivers.
DISCUSSION:
The following sections cover key features of the Governor’s revised budget proposal and highlight budgetary actions of importance to San Mateo County. For additional information on department impacts, please refer to the attached detailed table.
May Revision
The Governor’s budget proposal includes the following notable proposals that would impact County residents and operations:
FY 2023-24 Vehicle License Fee (VLF) Shortfall
The revised state budget does not include the County’s $114,340,340 million FY 23-24 VLF backfill to the County and its twenty cities. Of this amount, $67,818,230 is the County’s allocation.
Health
The Governor’s revised budget proposes significant reductions to benefits that would impact County public health operations, investments, and services to residents. To address high Medi-Cal costs, the proposal encompasses the following:
• Freeze on new enrollment to full-scope Medi-Cal coverage for otherwise eligible undocumented individuals, aged 19 and older, and who do not have satisfactory immigration status - effective January 1, 2026. San Mateo Medical Center’s (SMMC) preliminary estimate of the proposed freeze is based on a 20 percent reduction in Medi-Cal expansion enrollment. If these individuals were to transition to our local Access and Care for Everyone (ACE) program, annual ACE program enrollment would increase to an estimated 5,200, resulting in a negative financial impact of approximately $ 4.3 million. The SMMC will continue to revise this estimate as additional information on the effects of the freeze becomes known.
• $100 Medi-Cal monthly premiums for individuals with unsatisfactory immigration status (UIS) aged 19 and older - effective January 1, 2027. This new requirement will make it more difficult for county residents to remain on Medi-Cal, as these individuals make zero to little income. There are also serious concerns regarding the idea that once a UIS Medi-Cal member is disenrolled for non-payment, they will be unable to re-enroll in Medi-Cal due to the suspension of their UIS enrollment. As a result, these individuals will likely need to be enrolled in the ACE program or Kaiser CHCP.
• Elimination of Prospective Payment System (PPS) rates to clinics for individuals with UIS. This proposal would significantly reduce the number of federally qualified health center clinic visits provided by SMMC that qualify for PPS reimbursement, reversing recent increases in reimbursement related to the Medi-Cal expansion.
• Elimination of long-term care benefits for individuals aged 19 and over with IUS - effective January 1, 2026. Long-term care admissions for the UIS Medi-Cal expansion population at SMMMC are low. The elimination of these benefits, in conjunction with the elimination of IHSS, could lead to increased demand for long-term care services. Our county residents who do not have satisfactory immigration status will no longer be eligible and will have to pay out of pocket or purchase private insurance for this service.
• Elimination of full-scope dental coverage for Medi-Cal members with UIS aged 19 and over - effective July 1, 2026. Elimination of the dental benefit will reduce SMMC’s fiscal year 2026-27 projected revenue by $2 to $3 million. Yet more importantly, the ACE program does not cover non-emergency dental visits. This means neither the ACE participants nor the remaining Medi-Cal full-scope expansion population will have access to non-emergency dental coverage.
• Reduction of $158.million General Fund in 2025-26 and ongoing to eliminate IHSS benefits for individuals regardless of immigration status, aged 19 and older. This change will particularly impact county residents who require Protective Supervision, those with high care needs, and individuals who live alone without family care providers, making the transition especially challenging for them.
Additionally, the May proposal reinstates 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, 2026. Our local adult indigent healthcare program, ACE, does not have an asset test. Therefore, county residents, regardless of immigration status, who do not qualify due to their assets and who are also not eligible or enrolled in Medicare, can qualify for ACE if they meet the income requirement.
The May revision reflects the MCO tax revenue of $9 billion in 2024-25, $4.2 billion in 2025-26, and $2.8 billion in 2026-27 to support the Medi-Cal program. Compared to the Governor’s January Budget, these amendments provide an increase of $1.1 billion in 2024-25 and decreases of $200 million in 2025-26 and $400 million in 2026-27. The impact on SMMC will depend on the distribution methodology (which has not been determined yet) and whether this is considered net new funding.
Human Services
The Governor’s proposal preserves the inclusion of funds for the 2025-26 Single Allocation for CalWORKs and contains significant reductions to other human services, specifically, as it relates to IHSS, as prefaced in the previous section.
Reductions to IHSS
• $707.5 million General Fund and ongoing to cap IHSS provider overtime and travel hours at 50 hours per week - effective 2025-26. In San Mateo County, a significant number of providers will be affected by this shift, potentially resulting in service gaps and necessitating adjustments to provider assignments and care plans for recipients. As more data becomes available, the county will need to navigate these operational challenges, ensuring compliance with the new cap while minimizing disruptions to recipient care.
• $110.6 million General Fund in 2025-26 to conform the IHSS coverage with the timing of Medi-Cal coverage. The number of affected cases will fluctuate based on renewal submissions, raising concerns about continuity of care, as some recipients may lose their care providers, and providers could go unpaid due to delayed Termination Notices of Action (NOAs). Operationally, IHSS and IHSS Public Authority (PA) staff will face increased workloads, managing terminations, reinstatements, and missed payments for recipients. The IHSS PA Registry may also see higher demand for replacement providers, as some may leave during coverage gaps. These challenges underscore the importance of proactive planning and advocacy to mitigate disruptions.
• $158.8 million General Fund in 2025-26 and ongoing to eliminate IHSS benefits for individuals with UIS, who are 19 years old and above. Reference health section.
• $81 million General Fund in 2025-26 to reflect the assumed costs for counties to cover the IHSS, Community First Choice Option (CFCO) reassessment late penalties. As of May 15, 2025, in San Mateo County, there are 717 overdue CFCO cases, accounting for 8 percent of all cases, which remains within the California Department of Social Services' compliance requirements. However, until the operationalization of CFCO and late penalties are determined, the severity of penalties remains unclear.
• $25.5 million General Fund in 2025-26 to conform IHSS with the reinstatement of the Medi-Cal asset limit. Reference health section.
The May Revision does not include any funds to address county administrative costs associated with IHSS.
CalWORKs Single Allocation
In San Mateo County, the CalWORKs single allocation provides funding for multiple program components, allowing for flexibility in shifting funds between Eligibility, Employment Services, Cal-Learn, and Cal-OAR. The May Revision includes $1.6 billion in total funds in 2025-26 for the Single Allocation, which reflects an increase of $6.3 million in total funds compared to the Governor’s January budget. The County's Human Service Agency is projecting an increase of $89,000 from the January proposed budget.
Housing & Homelessness
The May Revision does not contain any new proposals related to homelessness funding. Consistent with the Governor's January Budget, it does not propose extending the Homeless Housing, Assistance, and Prevention (HHAP) program into 2025 -26. The program provides flexible funding to counties, large cities, and continuums of care to address homelessness in local communities.
The May Revision instead focuses on the proposed establishment of the new California Housing and Homelessness Agency, which will be responsible for coordinating state efforts related to housing and homelessness. It includes $4.2 million in 2025-26, $6.4 million in 2026-27, and $6.2 million in 2027-28, with ongoing support to facilitate the reorganization of the Business, Consumer Services, and Housing Agency. The goal is that the new agency will manage and create integrated housing programs, streamline policies, and simplify the administration of state affordable housing programs. The California Housing and Homelessness Agency will oversee the following entities:
• Department of Housing and Community Development
• California Interagency Council on Homelessness
• California Housing Finance Agency
• Civil Rights Department
• Housing Development and Finance Committee
Furthermore, the updated budget proposal indicates the Governor’s support for a potential statewide housing bond measure. Assembly Member Wicks and Senator Cabaldon introduced nearly identical $10 billion housing bond measures earlier this year. Assembly Member Wick’s bill, AB 736, is moving through the legislature.
Legislative Budget
State Senate and Assembly leaders have not yet released their proposed joint budget framework (as of the date this report was written). Governor Newsom and Democratic legislators face difficult decisions regarding which programs may experience cuts due to the projected deficit. Although the Legislature must pass a balanced annual budget bill by June 15, 2025, as required by state law, it is expected that the Legislature will need to reconvene in the fall for a special session to address federal budget decisions that are currently being debated in Congress.
Federal Update
Reconciliation Bill
The legislation combines tax, spending, and policy proposals across a wide range of federal programs. At a high level, and among other provisions, it would:
• Extend provisions of the Tax Cuts and Jobs Act of 2017, which is set to expire at the end of the year;
• Make additional changes to the federal tax code, including adjustments to the state and local tax (SALT) deduction cap and enhancements to the Low-Income Housing Tax Credit;
• Provide significant increases in funding for defense and homeland security;
• Restructure the Medicaid program;
• Reduce non-defense discretionary spending, particularly across green energy, environmental, and social service programs, and
• Provide new funding for agricultural producers and rural infrastructure with farm labor reforms;
• Raise the debt ceiling by at least $4 trillion, a level intended to secure the government’s borrowing capacity through the midterm elections.
The following are the main health and human services provisions of H.R. 1 of concern to California counties, as well as the anticipated impacts at the statewide level where available, according to an initial analysis by the Newsom Administration:
• FMAP Penalty for Coverage of Undocumented Immigrants - Reduces the Medicaid expansion FMAP from 90 percent to 80 percent for states that use state-only funds to provide coverage for individuals without qualified immigration status. The latest version of the bill extends the FMAP penalty to states like California that have adopted the Immigrant Children’s Health Improvement Act (ICHIA) option for waiving the five-year Medicaid waiting period for lawfully present children and pregnant women.
Ø Estimates are that the state could be penalized at least $4.4 billion in federal funding for using state dollars and the state’s Medi-Cal systems to provide non-emergency coverage to undocumented residents.
• Medicaid Work Requirements - Requires states to condition Medicaid eligibility for individuals ages 19-64 applying for coverage or enrolled through the Affordable Care Act (ACA) expansion group on working or participating in qualifying activities for at least 80 hours per month, effective December 2027.
Ø This could result in a loss of up to $22.3 billion in federal funding and cause up to 3 million people in the state to lose their coverage. This would also significantly drive up the uninsured rate and raise costs for hospitals treating uninsured patients.
• Medicaid Cost Sharing - Requires states to impose cost sharing of up to $35 per service on expansion adults with incomes 100-138 percent of the Federal Poverty Level (FPL). The bill now excludes mental health and substance use (SUD) services from cost-sharing requirements for the Medicaid expansion population.
Ø This new provision would create new financial barriers to care, as the state does not charge co-payments for services.
• Eligibility Determinations - Requires states to conduct eligibility redeterminations at least every 6 months for Medicaid expansion adults.
Ø This could result in up to 400,000 residents losing coverage, particularly those who move or fail to meet paperwork deadlines. It would also drive up the uninsured rate and raise costs for hospitals treating uninsured patients.
• Provider Taxes - Prohibits states from establishing any new provider taxes or from increasing the rate of existing taxes.
• State Directed Payments - Directs the Department of Health and Human Services (HHS) to revise state-directed payment regulations to cap the total payment rate for inpatient hospital and nursing facility services at 100 percent of the total published Medicare payment rate for states that have adopted the Medicaid expansion.
• Supplemental Nutrition Assistance Program (SNAP) Benefit-Cost Share - Requires states to pay a portion of benefits for the first time in program history, ranging from 5 to 25 percent based on payment error rates.
Ø Would likely impose a new 25 percent benefit cost-share on the state due to its payment error rate exceeding 10 percent. For FY 2024, that cost share would amount to about $3.1 billion.
• SNAP Administrative Cost-Share- Increases the state and county administrative cost share from 50 to 75 percent, up from the current 50/50 split with the federal government.
Ø Would raise the state’s share to 75 percent. In California, counties currently shoulder about 30 percent of the state’s non-federal administrative share. If this provision had been in effect in FY 2024, estimates are that the administrative cost for counties would have been $174 million.
• SNAP Zero-Tolerance Threshold - Imposes a new zero-tolerance threshold for payment errors.
Ø The state could face steep financial penalties for payment errors. Under current rules, overpayments and underpayments only count toward the error rate if they exceed $57 (adjusted for inflation), but the legislation would eliminate that margin.
• SNAP Work Requirements - Expands the general work requirements in the program as well as increases the number of persons subject to time limits on their benefits, including for the first time, parents of school-aged children over six and older adults aged 55 to 64, by expanding work requirements and restricting waivers.
Ø Preliminary estimates are that this new requirement would put 888,000 Californians at risk of losing some or all of their SNAP benefits.
In addition, the GOP megabill will cause serious harm to the state’s healthcare system. If passed, the proposal would strip Medicaid (Medi-Cal) coverage from up to 3.4 million Californians, cost the state an estimated $30 billion in lost federal funding, disrupt the financial tools used to fund the program and penalize states, including California, for spending state dollars to provide non-emergency care to undocumented residents.
The following are additional provisions of H.R. 1 of concern to California counties:
• SALT Deduction - Increases the deduction cap to $40,000 for individuals making under $500,000 in annual modified adjusted gross income (MAGI), and $20,000 for married individuals filing returns separately making under $200,000 in annual MAGI. The income threshold would increase by 1 percent each year through 2033, but the increase in the SALT cap would phase out by 30 percent for income over these limits until the cap returns to $10,000 or $5,000, depending on the filer.
• Child Tax Credit - Expands the Child Tax Credit from the current $2,000 level to $2,500 until 2028 and returns to $2,000 after. 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, leaving 20 million children from low-income families from receiving the full credit.
The bill now heads to the Senate, where major revisions are expected. The measure will first undergo review by the Senate Parliamentarian to determine whether it complies with the “Byrd Rule,” which states that only budget-related provisions can be included in reconciliation and pass by a simple majority vote. Even if it clears that hurdle, the bill faces opposition from both moderate and conservative Republicans, as some Senators have raised serious concerns about the bill’s Medicaid cuts. At the same time, other Senators have argued the package does not go far enough to reduce the federal deficit.
For their part, Democrats are preparing to launch a major campaign highlighting a distributional analysis by the Congressional Budget Office (CBO) that indicates the bill would disproportionately benefit the wealthiest 10 percent. At the same time, the poorest would see a net loss. With the reconciliation process requiring a simple majority for Senate passage, Majority Leader John Thune (R-SD) can only afford to lose up to three GOP votes. However, any changes made in the Senate, which has set an internal deadline of July 4th-at the urging of President Trump-to complete its work, will need to be approved again in the House before final passage.
State Vehicle Emissions Waivers
The House and Senate have passed three resolutions (H. J. Res. 87, 88, and 89) to rescind Environmental Protection Agency (EPA) waivers previously granted to the State of California under the Clean Air Act. These waivers allowed the State to implement stricter emissions standards for passenger cars and heavy-duty trucks, including mandates for zero-emission vehicles. President Trump is expected to sign these joint resolutions. The resolutions were advanced under the CRA despite objections from the Senate Parliamentarian and the Government Accountability Office, both of which questioned the legality of using the CRA in this context. Governor Newsom and Attorney General Bonta announced that the state intends to file a lawsuit to defend the state’s waivers.