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: Analysis of the Governor’s FY 2026-27 State Budget Proposal
RECOMMENDATION:
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Accept this informational analysis of the Governor’s FY 2026-27 State Budget Proposal.
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BACKGROUND:
On January 9th, Governor Gavin Newsom released his last state budget proposal for FY 2026-27, which largely outlines a status quo spending plan that limits new ongoing expenditures without making significant or additional reductions to currently funded programs. The plan outlines a $348.9 billion balanced budget that includes $248 billion in General Fund revenue, supported by stronger-than-expected cash receipts, resilient financial markets, and an estimated improved economic outlook. The proposal reflects more than $42 billion in additional General Fund revenue over the three-year budget window (FY 2024-25 through FY 2026-27) compared to last year’s enacted budget, resulting in a modest projected deficit of $2.9 billion. While the Administration assumes the current deficit to be relatively moderate, the Legislative Analyst’s Office estimates a much larger deficit of $18 billion for the upcoming year. The Governor’s January proposal also refills the state’s Budget Stabilization Account (Rainy Day Fund) to increase reserves. It suggests focused investments in education, affordability measures, public safety, wildfire resilience, and government efficiencies.
While the Governor’s budget includes $1.4 billion to address the state’s fiscal impacts as a result of the requirements of H.R. 1, it does NOT include any funding to address the impact of H.R.1 on county budgets. Counties are facing billions of dollars in new Medi-Cal, CalFresh, and indigent care costs due to the implementation of H.R. 1. These costs include direct cost shifts, increased county workload, and expanded demand for indigent care. In addition, as expected, the Governor’s budget proposal fails to include the County’s FY 2024-25 Vehicle License Fee (VLF) backfill amount of $119.2 million, or the past due amount of $37.7 million for FY 2023-24, owed to the County and its 20 cities. In coordination with the County’s state delegation and cities, the County will seek a permanent solution to this ongoing problem.
Looking ahead, the Administration will provide an updated budget proposal in May that balances the budget for both FY 2026-27 and FY 2027-28 while maintaining adequate budget reserves.
DISCUSSION:
The following sections cover several key components of the Governor’s FY 2026-27 proposed State Budget that are of importance to San Mateo County and its residents.
Additionally, the attached table outlines the impacts of the Governor’s January budget proposal on select County programs and services. Please refer to the table for more detailed information.
FY 2024-25 Vehicle License Fee (VLF) Shortfall
The proposed State Budget does not include the County’s $119.2 million FY 2024-25 VLF backfill to the County and its twenty cities as requested in August 2025. Of this amount, $70.8 million is the County’s allocation. The Governor’s proposed budget also does not include the $37.7 million still owed to the County and cities for FY 2023-24. Approximately, $22.4 million of this amount is the County’s allocation.
Health
Medi-Cal
The Medi-Cal budget includes $196.7 billion ($46.4 billion General Fund) in FY 2025-26 and $222.4 billion ($48.8 billion General Fund) in FY 2026-27. Medi-Cal is projected to cover approximately 14.5 million members in 2025-26 and 14 million members in 2026-27. The Medi-Cal budget includes adjustments related to the implementation of H.R. 1 as outlined below:
• Work and Community Engagement Requirement. H.R.1 introduced new work and community engagement requirements for the Affordable Care Act (ACA) Adult Expansion population, effective January 1, 2027. In total, these changes along with others, result in state General Fund costs of about $472 million in the FY 2026-27 budget year. However, this is offset by a proposed policy change to make certain immigrant populations eligible for only limited scope Medi-Cal benefits, which would reduce state costs by $786 million in the budget year. The state Administration’s proposal is to apply the work and community engagement requirements to individuals with unsatisfactory immigration status (UIS), even though federal law does not require it.
Ø SMC-HSA anticipates lower administrative funding and higher operating costs, with the overall impact pending state guidance.
• ACA Adult Expansion Population Six-Month Redetermination. As part of H.R. 1, the Department of Health Care Services will increase the eligibility redetermination frequency for the ACA Adult Expansion population from once per year to every six months, effective January 1, 2027. For FY 2026-27, this results in a cost reduction of $463.3 million total funds ($74.1 million General Fund) and $3 billion ($474 million General Fund) by 2029-30. Again, the Administration proposes to apply the six-month redetermination requirements to individuals with UIS, even though federal law does not require it.
Ø The County estimates this will impact approximately 62,000 individuals. This change will lead to increased workload, call volume, and office visits as more individuals seek assistance and reapply after failing to submit required documentation. SMC-HSA anticipates additional staff training to meet the semiannual eligibility redeterminations.
• Restrictions on Immigrant Eligibility. Effective October 1, 2026, H.R. 1 narrows the definition of qualified non-citizens who remain eligible for federally funded Medi-Cal. This change will exclude certain immigration statuses, which significantly reduces federal funding for this population. The budget proposes moving these individuals to restricted-scope Medi-Cal.
Ø SMC-HSA’s unsatisfactory immigration status (UIS) clients will lose full scope Medi-Cal coverage due to a change in the definition of the qualified non-citizen status requirement. Those recipients will move to emergency and pregnancy-related services only.
• UIS Emergency ACA Federal Medical Assistance Percentage (FMAP) Adjustment. H.R. 1 requires a change in FMAP from 90 percent to 50 percent for emergency services for ACA Adult Expansion population members with UIS, effective October 1, 2026. This results in additional General Fund costs of $658 million in FY 2026-27 and $872 million in the General Fund by FY 2029-30.
Ø County impact unknown.
• Reduced Retroactive Medi-Cal Timeframes. As a result of H.R. 1, there is a federally mandated reduction of retroactive Medi-Cal coverage from three months before an individual’s application date to one month for the ACA Adult Expansion population and two months for all other eligible groups, effective January 1, 2027. Estimated savings in FY 2026-27 are $23 million in total funds ($9.6 million General Fund) and $48 million in ongoing funds ($20 million General Fund).
Ø County impact unknown.
• County Administration. H.R. 1 changes Medi-Cal eligibility requirements for the Department of Health Care Services (DHCS) and county eligibility workers, particularly the ACA Expansion Population Six-Month Redetermination and the Work and Community Engagement Requirement. Budget documents indicate that DHCS is working with counties to assess the support needed for county implementation of the eligibility-related provisions of H.R. 1.
Ø The County estimates that approximately 36,200 to 53,700 San Mateo County residents could be impacted by these changes and thus could lose their Medi-Cal coverage.
Ø Administrative fiscal impacts for the County are expected to be limited. While Medi-Cal caseloads are projected to decline, increased eligibility and redetermination requirements will result in additional administrative costs.
• Indigent Care. While the state budget does not directly address county indigent care costs, the Administration states that it is working with counties to understand their impacts, cost pressures, and potential costs.
Ø There are approximately 830 enrollees in the County’s indigent care program, Access and Care for Everyone (ACE).
Human Services
CalFresh
Federal policy and cost-sharing changes included in H.R. 1 resulted in significant changes to CalFresh eligibility and increased the state’s share of costs for the CalFresh program. Budget adjustments include:
• Cost-Sharing Provisions. The Governor’s budget proposal includes an increase of $382.9 million in the General Fund in FY 2026-27 to reflect the federal share of CalFresh administrative cost reduction from 50 percent to 25 percent. As a result, the Budget assumes General Fund and county share of cost increases ($149.5 million) beginning October 1, 2026.
Ø SMC-HSA estimates the County’s share of administrative costs to rise from approximately 15 percent to 22.5 percent, resulting in an estimated $2.6 million increase in the share of costs.
• Eligibility Provisions. The Governor’s budget proposal includes $66.2 million in anticipated reductions in General Fund costs in FY 2026-27 due to changes in federal policy that reduce the number of individuals eligible for CalFresh benefits. These federal policy changes include, but are not limited to: ineligibility for certain lawfully present non-citizens; updated Able-bodied Adults without Dependents work requirements, and State Utility Assistance Subsidy limitations.
Ø SMC-HSA anticipates an increased workload for staff with the updated H.R. 1 eligibility rules to manage benefit discontinuances, notices, and increased client contacts. Approximately 1,000 local clients are expected to lose CalFresh eligibility, resulting in higher call volume and office visits, with additional operational and fiscal pressures despite estimated statewide administrative savings.
In-Home Supportive Services
The FY 2026-27 Governor’s Budget proposes the elimination of the IHSS Permanent Back-up Provider System, which would result in General Fund savings of $3.5 million in FY 2026-27 and ongoing. The Governor’s budget proposal also includes a reduction of $233.6 million in the General Fund by removing the State’s share of costs associated with any growth in IHSS hours per case, beginning in FY 2027-28. This is a direct cost shift to counties.
Ø The proposed elimination of the IHSS Backup Provider System would remove approximately $40,000 in annual funding for SMC-HSA. This reduction would eliminate resources, thus reducing HSA’s capacity to respond to urgent provider needs and potentially create service gaps for IHSS consumers who rely on backup support.
Child Care
The Governor’s budget proposal includes an increase of $89.1 million ongoing General Fund for a cost-of-living adjustment for the California Department of Social Services administered childcare programs.
Ø SMC-HSA's Stage 1 is an open-ended entitlement program and should be unaffected. Stage 2 funding includes both State and Federal funding. A 1.3 percent increase to the $489,000 in Stage 2 State GF received in the current year would translate into an FY 2026-27 increase of $6,500.
Housing and Homelessness
The Governor’s budget proposal focuses on implementing existing housing programs and creating the consolidated California Housing and Homelessness Agency (CHHA), which is intended to be operational by the beginning of the Budget Year on July 1, 2026. The Housing Development and Finance Committee (HDFC) will be a new entity within the CHHA, focused on creating a single entity responsible for allocating state housing funding. The Governor’s budget proposal also discusses potential May Revision proposals to finance housing rebuilding from the Los Angeles fires and to better support affordable housing preservation through state funding programs and housing tax credits.
Homeless Housing, Assistance, and Prevention Program (HHAP)
The Governor’s January Budget proposal includes $500 million for Round 7 of the HHAP program, as committed in last year’s SB 131 (Chapter 24, Statutes of 2025). That budget trailer bill also stated that, before allocating the $500 million, legislation must be enacted specifying the parameters for Round 7 of the program. This legislation must address the conditions applicants must meet, including a compliant housing element, a local encampment policy, a pro-housing designation, the use of local resources, and evidence of progress and urgency. SB 158 (Chapter 650, Statutes of 2025), an end-of-session budget trailer bill, was subsequently enacted and included the California State Association of Counties (CSAC) request that Round 7 funding should be available for disbursement beginning 60 days into FY 2026-27. The legislation that sets the parameters for Round 7 of the program has not yet been enacted. CSAC is advocating for the adoption of such legislation quickly and in a way consistent with principles developed with coalition partners.
Ø SMC-HSA anticipates a reduction of HHAP 7 funding by 50 percent. HSA estimates a reduction of approximately $2.5 million based on reduced statewide funding. HHAP 7 implementation details and revised grant requirements have not yet been released, and a material reduction could significantly affect local homeless services and shelter capacity, reducing service levels for clients.
Transportation
Bay Area Transit Loans
The Governor’s budget proposal seems to preview forthcoming trailer bill language regarding transit loans for Bay Area transit operators. Transit and Intercity Rail Capital (TIRCP) Program funding allocated to projects within the Metropolitan Transportation Commission region that do not require TIRCP funding for several years has been discussed as a potential source of loan funding.
Ø No further details at the moment. The IGPA Unit will continue to track this issue.
Climate and Environment
Cap-and-Invest
The Governor’s budget proposal reflects the new Cap-and-Invest reauthorization parameters, including the allocation structure and expenditure agreements for the “legislative discretionary funding” made in the 2025 Budget Act. There will be up to $560 million annually from Cap-and-Invest auction proceeds for affordable housing administered by the Housing Development and Finance Committee as part of the Administration’s modernization of the Affordable Housing and Sustainable Communities Program.
Ø This may be funding the County could tap into to fill critical financing gaps for 256 new affordable housing units that have already applied for County funding, including 98 new affordable housing units on County-owned land. While this funding source remains available for a very limited number of projects that meet its eligibility requirements, it does not replace the need for additional state investments to meet the County’s housing shortage.
Climate Bond (Proposition 4)
The Governor’s budget proposes to allocate $2.1 billion from the $10 billion 2024 Climate Bond in FY 2026-27, leaving $4.6 billion to be appropriated in future years. Allocations are as follows:
• Safe Drinking Water, Drought, Flood, and Water Resilience - $792 million
• Wildfire and Forest Resilience - $314 million
• Coastal Resilience - $107 million
• Extreme Heat Mitigation - $241 million
• Biodiversity and Nature Based Solutions - $199 million
• Climate Smart Agriculture - $89 million
• Outdoor Access - $35 million
• Clean Air and Energy - $236 million
Upon further notice of eligibility requirements, the County may be able to apply for funding opportunities focused on projects that invest in infrastructure and build resiliency.
Public Safety and Justice
Proposition 36 (2024)
The 2025 Budget Act appropriated $100 million from the General Fund one-time for Proposition 36 implementation. The Governor’s budget proposal does not include any new funding to address county costs to implement Proposition 36 in FY 2026-27 or thereafter.
Ø The Behavioral Health and Recovery Services Division, within Health Systems, has a small number of Proposition 36 clients. The County impact is expected to be limited.
Ø Additionally, the Sheriff’s Office is impacted by the implementation of Proposition 36. Although the impacts are widespread, they are not easily quantified yet.
FISCAL IMPACT:
The fiscal impact is currently unknown. The Intergovernmental and Public Affairs (IGPA) Unit and departments will continue to closely monitor state budget discussions in the coming months and advocate for the interests of the County and residents.