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key takeaway

Federal deportation policies and restrictions on immigration are not only tearing apart California families but also threatening the state’s economic vitality, workforce stability, and access to essential services like food, housing, and care.

California is home to the largest share of immigrants in the United States. Immigrants are an integral part of California’s social fabric, pay taxes, and contribute to its economic success. Over 1 in 4 Californians are immigrants, totaling almost 11 million people who are family members, neighbors, friends, and community members. Federal actions to carry out mass raids and deportations, along with restrictions on legal immigration, humanitarian visas, and temporary protection programs, will have detrimental effects on families, communities, and the state’s entire economy.

Undocumented immigrants alone contribute $8.5 billion in taxes to help pay for California’s public services, many of which they cannot benefit from. Together, immigrants in California are responsible for over $1 trillion in economic output. With federal attacks on immigrants putting millions of California families in fear and danger, state leaders should take action to ensure families and communities are safe and supported.

Who Makes Up California’s Immigrant Population?

The nearly 11 million people who are immigrants in California are a diverse group of naturalized citizens and about 4.8 million non-citizens, each with different immigration stories and aspirations. Within this group, nearly 18,000 people seeking safety in the United States — about 3,700 refugees and 14,000 asylees — settled in California in 2023. The state also consistently ranks among the top states home to temporary guest workers, with about 80,000 H-1B visa holders for highly skilled workers, and 45,000 H-2A visa holders for agricultural workers, welcomed in a single year.

Among California’s immigrant population, there are nearly 70,000 people with Temporary Protected Status (TPS) and over 150,000 Deferred Action for Childhood Arrivals (DACA) recipients, who are protected from deportation and have permission to be in the United States, and about 1.8 million people are undocumented. Undocumented Californians are inextricably embedded in our communities. In fact, nearly three-quarters of undocumented Californians are estimated to have lived in the United States for over a decade, the overwhelming majority are in school or working, nearly a quarter are homeowners, and most live in a mixed-status household with a child or spouse who is a US citizen.

How Much More Might the Federal Government Spend to Increase Detentions and Deportations?

After approving in March additional funding for the current fiscal year to help the Trump administration carry out its detention and deportation agenda, Republicans in Congress are now advancing new legislation to significantly boost this funding further over the next several years. In late April, House committees began moving forward legislation that would allocate roughly $80 billion in fiscal years 2025 through 2029 largely to US Immigration and Customs Enforcement (ICE) for immigrant detention, deportation, and related efforts. This represents a dramatic increase in funding for ICE relative to its approximately $9 billion budget in fiscal year 2024. This additional funding includes:

  • $45 billion to increase ICE’s capacity to detain families and individuals apprehended by the Department of Homeland Security (DHS). This is 13 times ICE’s budget for detention in fiscal year 2024 and would substantially increase detention capacity.
  • $14.4 billion for “transportation and removal operations.”
  • $8 billion to hire new ICE officers and other personnel as well as roughly $1.5 billion for employee recruitment, training, and bonuses. This legislation also directs ICE to hire a minimum of 10,000 new personnel by fiscal year 2030, with minimum annual targets which would increase staff by roughly 50% over the more than 20,000 law enforcement and support personnel ICE employed in fiscal year 2024.

Although it is not yet clear what the specific impact of increased funding for detentions and deportations would be on Californians, ICE representatives have indicated that they are exploring options to expand detention capacity in the state. There are currently six active detention facilities in California, all with well-documented track records of human rights abuses, and all operated by private, for-profit companies that stand to profit further from significantly increased federal spending.

Additional legislation moving through House committees in late April would significantly increase funding for Customs and Border Protection (CBP) over the same five-year period, including $46.5 billion for border wall construction, nearly $8 billion for recruiting, hiring, training, and retaining CBP agents and other personnel and the acquisition of additional patrol vehicles, and $5 billion for CBP facilities and checkpoints. This represents a large increase in CBP’s budget, which totaled just under $20 billion in fiscal year 2024, and together with increased funding for ICE, would dramatically expand the federal government’s capacity to carry out its anti-immigrant agenda.

What Is the “Chilling Effect” and How Does it Impact Families?

Restrictive and harsh immigration policies have been shown to produce a “chilling effect” throughout immigrant communities, wherein immigrant families avoid interacting with public services and institutions for fear of being exposed to deportation threats. Even the threat of these policies being enacted, as has been the case during the current administration, is enough to trigger a chilling effect among immigrant communities across California.

The consequences of this chilling effect are especially acute for the over 3.3 million people in mixed-status families in California. Mixed-status families often become isolated from communities and avoid applying for jobs, talking to police, and/or traveling for fear of drawing attention to themselves or an undocumented family member. This could mean a loss of household income if individuals feel unsafe going to work, making it difficult to pay bills and put food on the table. Children may stop going to school for fear of risking their parents’ deportation, hindering their educational attainment. In addition, research found that children in mixed-status families suffered adverse mental and physical health outcomes due to the fear of deportation and family separation.

In practice, the chilling effect means families often refrain from applying for and utilizing benefits they legally qualify for, like income, nutrition, and housing assistance programs. The lack of uptake in these programs, especially CalFresh and Medi-Cal, means community members often suffer adverse health outcomes. The impact on usage of public benefits can be further exacerbated by “public charge rules.” A public charge rule proposed during the first Trump administration, which would have expanded the criteria under which immigrant applicants could be denied residency for having used or being projected to receive public benefits in the future, caused a significant chilling effect. Any similar proposals during the current administration would likely make families even more hesitant to utilize public services even if they qualify.

The federal government plays a major role in shaping California’s budget, economy, and the well-being of its people.

What Are the Ripple Effects of Deportations on Families?

The adverse health and financial consequences of deportation on families are well documented. Living near areas that are the target of immigration enforcement raids has been shown to negatively impact the educational and health outcomes among children of immigrants. The actual deportation of family members who financially support households can have severe economic consequences for families due to the abrupt loss of income. In 2021, 1.55 million children in California lived with an undocumented parent, underscoring that the strain of deportation goes beyond the individual at risk of removal. Children whose parents are detained and deported are at greater risk of entering the child welfare system. Even if these family members end up being allowed to stay in California, it can be nearly impossible to find steady employment, leading to long-term income loss.

The financial strain on families after the deportation of a primary earner often leads to housing instability, making it difficult to afford rent and increasing the risk of eviction or, in severe cases, homelessness. In 2019, an estimated 58% of renter households with undocumented residents were paying unaffordable rents with about one-third paying more than half of their income toward rent. More recent figures indicate that nearly two-thirds of undocumented immigrants were burdened with housing costs, ten percentage points higher than their US-born counterparts.

Undocumented and immigrant tenants also face heightened discrimination, further limiting their housing options and making it harder to secure stable living arrangements. To cope, families may be forced to move in with relatives, leading to overcrowded living conditions that pose physical and mental health risks while also attracting greater scrutiny from landlords or housing providers. This instability can disrupt children’s education, strain community resources, and push families into unsafe or substandard housing, further deepening economic and social hardships.

How Do Immigrants Help Drive California’s Economy?

Undocumented immigrants play a vital role in stimulating the economy as workers, business owners, taxpayers, and consumers. Their contributions boost national economic growth and lower the US deficit, according to recent research by the Congressional Budget Office. Given this, large-scale deportations would have a devastating impact on the economy, depriving businesses of workers and consumers, and depriving public services of critical tax dollars.

California’s economy would be especially hard hit. In California, all immigrants, including those who are undocumented, are estimated to contribute to more than $1 trillion in economic output — nearly one-third of the state’s total output — putting immigrants’ contributions on par with the economic output of Ecuador. One study suggests that undocumented immigrants in California are the source of $152 billion in economic output, roughly 5% of the state’s total output.

Undocumented Californians also make essential contributions by paying billions of dollars in taxes each year. In 2022, they paid nearly $8.5 billion in state and local taxes, including sales taxes, individual and business income taxes, property taxes, and unemployment taxes, among others. These tax dollars benefit all state residents by supporting education, roads and transit, emergency response, the social safety net, and much more. Deportations would reduce state and local tax revenue at a time when California and several large cities in the state, including Los Angeles and San Francisco, are facing structural budget deficits.

What Effect Would Restrictive Immigration Policies Have on Key Industries in California?

Immigrants are essential to California’s labor force, with a total of 6.1 million immigrants employed in California from 2021 to 2023, representing 1 in 3 workers in the state, who help power the fourth largest economy in the world.

Policies that limited immigration both prior to and during the pandemic decreased the share of immigrant workers in the US, which resulted in more job openings than available workers. Having enough workers is crucial to keeping the economy going and immigrant workers serve a key role in this. Specifically, in California, nearly two-thirds of workers in the agriculture, forestry, fishing, and hunting industries are immigrants. Additionally approximately 2 in 5 workers in the manufacturing, construction, other services, and transportation and utilities industries are immigrants. Therefore, deportations and other actions that restrict immigration would have compounding effects on several key industries in California including housing, agriculture, and caregiving. 

How Would Deportations Harm Employment Opportunities for US-Born Workers?

Immigrants, including those who are undocumented, not only help fuel the economy by filling key jobs thereby closing gaps in the local labor markets, but also help generate jobs for US-born workers, both directly through entrepreneurship and indirectly.

Entrepreneurship is another key way immigrants make vital contributions to California’s economy that would be undermined by deportations. Nearly 900,000 immigrants in California are entrepreneurs, collectively generating $28.4 billion in business income. In fact, roughly 2 out of 5 entrepreneurs in the state are immigrants, compared to just under one-quarter in the US as a whole. Research finds that undocumented immigrants, particularly those of Mexican origin, were the primary drivers of a surge in self-employment and entrepreneurship among Latinx immigrants over the past two decades.

Immigrant workers also benefit US-born workers by indirectly creating jobs. Research has also consistently shown that deportations harm US-born workers. Specifically, for every 13 foreign-born workers who leave the labor force because of direct removals and the chilling effect of deportations, 10 US-born workers lose their jobs, making clear that immigrants are generating jobs for US-born workers, not taking them. This is because immigrant workers are not substitutes for US-born workers. Undocumented workers hold essential jobs, like construction workers, farm workers, and caregivers, that are crucial to society and are not easily filled by US-born workers. When the share of immigrant workers falls, there are negative impacts for all workers. For example, a decline in the number of immigrant caregivers may cause US-born workers to leave the workforce to care for their children, or a decline in the number of immigrant construction workers may reduce the need for construction managers, who are more likely to be US citizens. Additionally, because immigrants generate economic activity as workers and consumers, deportations reduce business revenue, which in turn leads to fewer jobs available for US-born workers.

What Can State Leaders Do to Protect Immigrant Communities?

With federal attacks on immigrants putting millions of Californians in fear and danger, state leaders should take action to ensure families and communities are safe and supported. 

This should include increasing state funding for immigrant legal services, which provide a lifeline to immigrants, helping them access relief they are entitled to under federal law. Increased funding is needed to meet the high demand for these services among children, families, and workers as federal policymakers dismantle immigrants’ access to justice. State policymakers should also strengthen protections that create safety for immigrants and their children at schools, child care facilities, health care facilities, and other essential community spaces, and they should strengthen data protections to prevent sensitive information, such as immigration status, held by public entities from being used for unauthorized or harmful purposes. Strengthening support for California immigrants and their families in the face of federal threats is not just a moral imperative but a strategic investment in our communities, economy, and collective prosperity.

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key takeaway

California’s Medi-Cal spending is higher than expected this year due to several factors, including rising health care and prescription drug costs, extended COVID-era protections, and expanded eligibility. State leaders should focus on long-term, sustainable solutions to protect Medi-Cal and ensure access to care for all.

Spending for Medi-Cal, California’s Medicaid program, has come in higher than expected this year, prompting state leaders to take early budget action. Estimating costs for a program of this scale is increasingly difficult, especially as health care services and prescription drug prices rise nationwide. Key cost drivers this year include the growing use of high-cost medications, extended COVID-era protections to help keep people insured, and expanded eligibility for undocumented adults, who contribute billions in taxes and are essential to California’s economy. Health care spending is complicated and cannot be attributed to a single factor. State leaders should focus on long-term, sustainable solutions, including protecting Medi-Cal from harmful federal cuts to ensure that all Californians, regardless of immigration status, have access to health care, which keeps all communities healthy and reduces long-term costs for the state.

What’s Going On with Medi-Cal Spending This Year?

On March 4th, the California Department of Finance activated a $3.44 billion medical provider interim payment loan to manage Medi-Cal cash flow and ensure timely payments to providers and plans. Such adjustments are typical for a program as large and complex as Medi-Cal, which is estimated to cost around $188 billion in the 2025–26 fiscal year.

A few weeks later, on April 10th, the state Legislature passed AB 100, an early action “Budget Bill Junior” that amends the 2023 and 2024 Budget Acts. One of the many changes AB 100 makes is it increases Medi-Cal’s 2024-25 General Fund appropriation by $2.8 billion and its federal funds appropriation by $8.25 billion for the current fiscal year. The governor signed the bill into law on April 14th.

During a public hearing, the California Department of Finance clarified that the $2.8 billion from AB 100 is separate from the $3.4 billion loan. Together, these two budget actions are intended to help the administration manage Medi-Cal expenditures through the end of the year.

Additional details on the state’s fiscal outlook, including updated revenue projections and spending estimates, will be available when the governor releases the May Revision. These updates will offer a clearer picture of whether the current budget actions are sufficient or if further adjustments will be needed.

These budget actions underscore the challenges of accurately estimating Medi-Cal costs and reflect broader trends in rising health care spending that are affecting state budgets across the country. Medi-Cal provides free or low-cost health coverage to over one-third of the state’s population and represents one of the largest and most complex components of the state budget. Its cost is influenced by a wide range of factors, including enrollment fluctuations, rising medical costs, and shifts in federal policy and funding. And California is not alone. States across the country are facing similar pressures as they work to sustain Medicaid programs and ensure access to care amid rising costs.

Why Did State Leaders Underestimate Medi-Cal Spending?

The 2024 Budget Act was based on enrollment and expenditure data through January 2024, but at that time, the California Department of Health Care Services had only one month of actual data reflecting major policy changes, including:

  • Eliminating the asset test for non-MAGI (non–income-based) Medi-Cal.
  • Extending coverage protections during the COVID-19 unwinding period.
  • Expanding full-scope Medi-Cal to adults ages 26-49, regardless of immigration status.

Another reason why estimating Medi-Cal spending is challenging in any given year is because of its accounting method. Medi-Cal operates on a cash accounting basis, meaning spending is recorded when payments are made, not when services are delivered. This approach makes the timing of revenue receipts and reconciliations a critical factor in budgeting, as they directly affect cash flow and financial planning.

The Legislative Analyst’s Office notes that Medi-Cal spending estimates can vary significantly between the Governor’s January budget proposal, the May Revision, and final budget enactment. Even after the budget is approved, significant adjustments are common.

Are Budget Adjustments for Medi-Cal Normal?

Yes. Budget adjustments are a routine part of managing a program as large and complex as Medi-Cal. Since 2012–13, the Legislature has been formally notified six times that Medi-Cal would exceed its budgeted amount.

Typically, these adjustments happen during the May Revision, when updated data is available. The state then uses loan authority to maintain program operations and adjusts funding through the Budget Act. What’s different this year is the timing and size of the shortfall. The March request came earlier than usual and exceeded the previous loan cap of $2 billion. In 2023, lawmakers raised the cap to 10% of the Medi-Cal General Fund appropriation to reflect the growing scale of the program.

What Is Contributing to Recent Medi-Cal Cost Increases?

In a public hearing on March 17th, the California Department of Health Care Services identified several key reasons for rising Medi-Cal costs:

  • Health care is getting more expensive nationwide. Health care costs are increasing across the board, affecting Medicaid, Medicare, and private insurance. From 2022 to 2023, total U.S. health care spending grew to $4.87 trillion, significantly exceeding the 4.1% average annual growth rate of the 2010s. Other states are experiencing similar cost increases.
  • Pharmacy costs are rising, especially due to anti-obesity medications. Pharmacy costs have risen sharply, which is consistent with what a lot of other states are experiencing. A major factor is the increased utilization of high-cost GLP-1 medications (e.g., Ozempic and Wegovy) for obesity treatment. Across the states that cover GLP-1s for obesity treatment for Medicaid enrollees, spending on GLP-1s have soared. According to the Kaiser Family Foundation, the number of GLP-1 prescriptions increased by more than 400%, while gross spending increased by over 500% from 2019 to 2023. In addition, the US pays significantly more for these drugs than peer nations, such as Japan, Switzerland, and Canada.
  • More people are staying enrolled in Medi-Cal due to a pandemic-era federal policy that allowed people to keep their coverage. State leaders extended this policy through June 2025 to increase automatic Medi-Cal renewals and reduce coverage disruptions. When the state initially resumed Medi-Cal renewals after pausing them during the pandemic, many people lost coverage due to administrative barriers. By extending these flexibilities, more people have remained enrolled than expected, ensuring continued access to care.
  • The expansion to undocumented adults added new costs — but also major benefits. The expansion of full-scope Medi-Cal to undocumented adults has resulted in higher-than-anticipated enrollment and pharmacy costs. Undocumented Californians contribute significantly to the state, paying nearly $8.5 billion to state and local communities. Expanding coverage not only improves individual health outcomes but also moves California closer to universal health coverage, which plays a crucial role in reducing poverty and promoting economic stability. Without health insurance, people are more likely to face high medical costs or debt and are less likely to receive preventive care or treatment for chronic conditions.
  • There is less Managed Care Organization (MCO) tax revenue to “offset” General Fund spending on Medi-Cal. The passage of Proposition 35 in November 2024 reduced the amount of MCO tax revenue available to offset General Fund spending on Medi-Cal. While Prop. 35 allows policymakers to continue using a portion of MCO tax for this purpose, the amount has been reduced and will decrease further starting in 2027. Instead, Prop. 35 directs MCO tax revenue toward specific health care investments, including increasing reimbursement rates for primary care providers and expanding access to specialty care services.

In short, it’s misleading to blame any single factor for the rise in Medi-Cal spending. Attempts to single out immigrants, particularly undocumented Californians, as the cause ignore the whole picture and reinforce harmful narratives. The reality is that cost increases stem from a combination of factors, including national trends in health care spending, higher pharmacy costs, and policy choices aimed at keeping California families insured. Focusing on any one factor ignores the broader, systemic drivers behind the budget challenges and undermines the importance of affordable health care for all Californians.

Why Is It Important for Everyone to Have Health Coverage?

When all Californians — regardless of race, age, disability, or immigration status — have access to comprehensive health care, the entire state benefits through improved health, stronger communities, and reduced long-term costs.

The cost of providing full-scope Medi-Cal coverage to income-eligible undocumented Californians is a small part of overall program spending, but the benefits are significant. State leaders should maintain access to Medi-Cal for undocumented Californians because it improves health outcomes, strengthens public health, supports families, and reduces long-term costs.

Ultimately, it is far more costly — both financially and socially — to exclude people from health coverage. Ensuring broad access to Medi-Cal improves lives, protects public health, and builds a healthier California for everyone.

What Are the Real Threats to Medi-Cal’s Future?

California’s current Medi-Cal shortfall is solvable. But federal proposals to cut Medicaid funding would take away health coverage for millions in California and across the country.

Congressional Republicans and the Trump administration are pushing for Medicaid cuts in favor of extended tax breaks for the wealthy. These cuts threaten critical health care for millions of people across the state, including children, pregnant individuals, seniors, and people with disabilities. Without access to health coverage, Californians would face impossible choices that put their health and livelihood at risk while also driving up long-term costs for the state.

How Can State Leaders Protect and Strengthen Medi-Cal?

To protect and strengthen Medi-Cal, state leaders should increase revenues by making the tax system more equitable to support programs, like Medi-Cal, that millions of Californians depend on. One way to increase revenues is to re-evaluate tax breaks that benefit wealthy individuals and large corporations. As the demand and costs for services grow, so too must the resources to meet those needs.

With federal leaders poised to cut Medi-Cal in order to help pay for cutting taxes for wealthy individuals and corporations, it is imperative for state leaders to use all of the tools at their disposal to protect Californians’ access to health care.

As California’s population ages and health care costs continue to rise, the state must pursue long-term, sustainable funding solutions, not just short-term budget fixes, to protect Medi-Cal for future generations.

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Medi-Cal saves lives. It’s a lifeline that provides free or low-cost health coverage for over one-third of California’s population. Yet Congressional Republicans and the Trump administration are actively pushing proposals to cut Medicaid funding in favor of tax breaks for the wealthy. Such cuts would mean taking critical care away from millions of people across the state, including children, pregnant individuals, seniors, and people with disabilities. Without access to health coverage, Californians would face impossible choices that put their health and economic security at risk while also driving up long-term costs for the state.

What is Medi-Cal?

Medi-Cal is California’s Medicaid program that provides free or low-cost health care to over one-third of the state’s population. The program serves individuals with modest incomes, including children, seniors, people with disabilities, and pregnant individuals. Medi-Cal is a lifeline for millions, ensuring access to essential health services that support public health and economic stability.

Who Is Eligible for Medi-Cal?

Most people qualify for Medi-Cal based on their income, a category known as Modified Adjusted Gross Income (MAGI) Medi-Cal. Eligible groups include:

  • Adults with incomes up to 138% of the federal poverty level (FPL). 
  • Pregnant individuals up to 213% FPL.

Children in families with incomes up to 266% FPL are also eligible through the Children’s Health Insurance Program (CHIP), which is fully integrated into Medi-Cal. In certain counties, like San Francisco, San Mateo, and Santa Clara, coverage extends up to 317% FPL, reflecting the high cost of living in those counties.

Some individuals qualify under non-MAGI Medi-Cal, which is based on factors other than income. This includes:

  • People who are blind, disabled, or age 65 and older. 
  • People receiving Supplemental Security Income (SSI). 
  • Residents in long-term care facilities. 
  • Former foster youth until age 26.

What Services Does Medi-Cal Cover?

Full-scope Medi-Cal covers a wide range of services, including doctor’s appointments, emergency services, physical and occupational therapy, dentist appointments, laboratory services, prescription drugs, vision care, preventive and wellness services, and behavioral health services. Medi-Cal also offers transportation to and from appointments for services that are covered by Medi-Cal.

why preventative care matters

Preventive care is good for people’s health and for California’s budget. Routine check-ups, screenings, and other preventive services help catch health issues before they become serious and more expensive to treat, research shows. Preventive care can reduce hospital visits, complex treatments, and long-term care. For example, managing high blood pressure with medication and regular doctor visits is less costly than treating a stroke or heart failure. Investing in prevention keeps people healthier while reducing avoidable health care spending.

In addition to these core services, Medi-Cal also covers services for specific populations, such as in-home supportive services (IHSS) for individuals with disabilities and expanded postpartum coverage for new parents.

How Is Medi-Cal Funded?

Medi-Cal is primarily funded by the federal and state government. The federal government contributes a share of the costs through a formula called the Federal Medical Assistance Percentage (FMAP). In California, the standard FMAP is 50%, though certain populations and programs receive an enhanced FMAP, such as the Children’s Health Insurance Program (CHIP) and Medicaid expansion under the Affordable Care Act (ACA). In addition to federal and state funds, Medi-Cal is supported by local government contributions, provider taxes, and fees from health plans.

How Does Medi-Cal Deliver Care?

Medi-Cal delivers care through two main models: managed care and fee-for-service (FFS). The vast majority of Medi-Cal members (88%) receive their care through managed care plans (MCPs). Under this model, the state contracts with health plans to coordinate and deliver services. These plans receive a fixed monthly payment from the state per enrollee regardless of how many services an individual uses. The remaining 12% of Medi-Cal enrollees receive care through the FFS model. Under FFS, enrollees can see any provider who accepts Medi-Cal, and providers are reimbursed per service delivered rather than receiving a set monthly amount.

California has expanded managed care over time to improve health outcomes, enhance care coordination, and control costs. Through initiatives like CalAIM (California Advancing and Innovating Medi-Cal), the state is shifting more services into managed care to provide integrated, person-centered care. These efforts aim to integrate physical health, behavioral health, and social services to support individuals experiencing homelessness, those with chronic medical conditions, and people involved in the justice system.

How Do Medi-Cal Reimbursement Rates Impact Access to Care?

Medi-Cal reimburses health care providers for services that they deliver to Medi-Cal patients, with rates varying based on the type of service, provider, and setting. Reimbursement rates are set by the state and approved by the federal government. However, these reimbursement rates are typically lower than those of Medicare and private insurance, which has discouraged provider participation.

Increasing provider participation in Medi-Cal is critical to improving access to a wide range of health care services, especially in historically underserved areas where there is often a shortage of providers. By increasing the number of providers in the Medi-Cal network, patients can receive more timely care, which can help improve health and well-being for all Californians. Revenue from Proposition 56, a tobacco tax increase which voters passed in 2016, provides additional funding to support provider payments. However, revenue from this tax has been on the decline.

What Is the Potential Impact of Medicaid Cuts?

Congressional Republicans have proposed cuts to Medicaid to pay for tax breaks for the wealthy. Medicaid is a lifeline for nearly 1 in 4 people nationwide, including children, seniors, people with disabilities, and adults with low incomes. For California, where Medi-Cal covers 1 in 3 people, these cuts would be devastating. Any reduction in federal funding would lead to a significant budget shortfall and could force the state to make difficult choices such as reducing Medi-Cal benefits, limiting provider payments, or restricting eligibility.

If federal funding losses approach or exceed $10 billion per year, California would not be able to replace federal funds with existing state resources alone. As a result, low-income Californians, communities of color, seniors, people with disabilities, and children would face the greatest harm, further deepening health disparities and reducing access to essential care. Reducing Medicaid funding in any form would likely leave more people uninsured and weaken California’s health care system overall.

How Would Medi-Cal Members Be Impacted by Work Requirements?

Work requirements are essentially cuts that cause significant health coverage losses. Such proposals would require Medicaid beneficiaries to regularly prove they are working, looking for work, or participating in job training programs in order to maintain coverage. However, these requirements are burdensome and unnecessary, as the vast majority of Medicaid enrollees under age 65 are already working or are not able to work due to caregiving responsibilities, illness or disability, or school.

Research shows work requirements are an ineffective policy tool that fail to increase employment. Instead, they create bureaucratic hurdles that cause people to drop off Medicaid — particularly people with disabilities, caregivers, and those working in unstable or low-wage jobs.

If implemented, work requirements would put over 8 million people in California at risk of losing their health coverage. (See this resource for details on the impact by congressional district.) Health coverage losses on this scale would not only harm people’s health and well-being but also weaken state and local economies.

Work requirements undermine the very purpose of Medicaid: it is health insurance, not a jobs program.

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key takeaway

CalWORKs is a crucial safety net program supporting low-income families. However, proposed budget cuts prioritize short-term employment over long-term stability, potentially undermining the program’s effectiveness and contradicting the governor’s stated goals.

The California Work Opportunity and Responsibility to Kids (CalWORKs) program plays a crucial role in supporting children and families with low incomes. CalWORKs helps families with children struggling to meet their basic needs by providing them with modest monthly cash grants and important supportive services. Recent state reforms to CalWORKs have been designed to improve the program’s capacity to support parents in identifying goals, addressing barriers, and securing sustainable economic stability and family well-being.

However, the recent governor’s budget proposal shifts the program’s focus, aligning it more closely with the problematic roots of the federal program. The proposed cuts would narrow the program’s focus to basic cash aid by diminishing vital support services and case management. These cuts prioritize rapidly moving parents into paid employment over addressing the broader, longer-term barriers to work and the resources necessary for families to flourish. This contradicts and would likely undermine the governor’s commitment to pursue a new federal opportunity designed to strengthen the program by focusing on family stability and well-being.

What is the history of the CalWORKs program?

The Temporary Assistance for Needy Families (TANF), as CalWORKs is known federally, was enacted in 1996 as part of President Clinton’s welfare reform, aiming to grant states more autonomy in addressing poverty and assisting families. However, the program fell short of fulfilling its original intent due to the prevailing narrative that not all families were worthy of assistance. This included racist, sexist, and historical biases, such as the “welfare queen” stereotype popularized by figures like then California Governor Ronald Reagan. This narrative influenced the 1990s reform that ultimately cut assistance and imposed punitive “welfare to work” training and employment requirements on TANF participants. Since its inception, the federal program has focused on quickly pushing parents into paid employment over addressing longer-term barriers to work and resources needed to lead thriving lives.

In 1997, California mirrored these federal reforms with the establishment of the CalWORKs program, signed into law by Governor Pete Wilson. Echoing sentiments at the federal level, Wilson framed the program as a means to prompt welfare recipients to “escape from dependency” on assistance while stressing the strict time limits and work requirements. At the core of this is the idea of “self-responsibility” that minimizes the systemic barriers that affect program participants, including racist and sexist discrimination in workplaces and educational settings, as well as the generational trauma stemming from living in poverty.

What does the future of TANF look like?

On June 3, 2023, President Biden signed the Fiscal Responsibility Act (FRA) into law. This piece of legislation was significant to safety net policy because it was the first time Congress had made significant programmatic changes to the TANF program in nearly two decades and provided a window of opportunity to fundamentally change the short-sighted work-first approach to the TANF program. Among various provisions, the FRA includes a pilot program that would fund up to five states to test alternative performance indicators instead of the work participation rate (WPR). States selected to participate in the pilot program would be evaluated based on:

  • The percentage of work-eligible participants employed after exiting the program;
  • The level of earnings of these participants; and
  • Other indicators of family stability and well-being.

The goal of the pilot program is to move away from evaluating program success based on work participation, which has been the single target metric since the program’s inception. The WPR is a process measure that only accounts for whether the parent is able to document their required hours of participation in a narrow set of approved activities. There is little evidence to suggest that work participation as a metric is indicative of long-term employment and self-sufficiency. Rather, research suggests that stringent work requirements push people into jobs similar to the ones they lost, leading up to their TANF participation. This creates an ineffective cycle of moving people between low-wage unstable employment and TANF benefits. There is no clear link between work requirements and reductions in poverty.

Are California policymakers prioritizing a family-first approach to CalWORKs?

In his January 10th proposed budget, Governor Newsom indicated, in reference to the federal pilot program, that “California plans to pursue this opportunity to reform the accountability tools in the CalWORKs program to improve outcomes for families.” While California has made significant progress toward tracking CalWORKs outcomes in creative ways with the introduction of the CalWORKs Outcomes and Accountability Review (Cal-OAR) framework and adopted an evidence-based behavioral approach to guide families in setting goals (CalWORKs 2.0), it has yet to make significant programmatic changes to disrupt the reliance on work participation as a metric for success.

Rather than expanding on this framework, the governor proposed significant cuts to the CalWORKs program, impacting administrative funding as well as reducing intensive case management services and effectively eliminating two programs that make a concerted effort to address barriers to employment and provide support to families with the most complex needs. The two impacted programs are:

How does the governor’s proposal to cut select CalWORKs programs align with the future of TANF?

The irony of the governor’s proposed cuts to CalWORKs is that they impact programs that would directly align with the intent of the new federal pilot program (described above). The ESE program has been successful in helping participants obtain work experience and development in their journey to finding a permanent job. This could lead to better outcomes in terms of employment and earnings after exiting the program, which is directly linked to the pilot objectives.

The FS program provides families with intensive case management and timely access to crisis management services, which directly aligns with the family stability and well-being goals of the pilot program. These services include a range of housing, mental health, substance abuse, and other supports critical to prevent family instabilities such as homelessness and child welfare system involvement. Additionally, the FS program is essential to remove barriers to work that may prevent participants from obtaining and maintaining employment. Together, these services better support families in exiting the program with sustainable economic security.

The governor’s budget proposal to effectively eliminate these two components of the CalWORKs program is contradictory to his goal of pursuing the federal pilot program. Taking away essential family support is reminiscent of the 1990s discourse that policymakers should move beyond. Rather than taking a step backward, California should continue to lead the way in creating a more family-centered CalWORKs program by leaning into the elimination of barriers to employment so that families can feel fully supported and be able to thrive. This will help ensure the state not only has a successful pilot application, but can demonstrate to the nation progress in the real family outcomes and pathways out of poverty that the pilot will assess. 

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key takeaway

Despite California’s commitment to funding education through Proposition 98, increased child poverty and budget shortfalls pose substantial challenges.

All California students deserve the opportunity to learn and achieve their goals. Recognizing the critical role schools play in supporting student success, California voters adopted Proposition 98 (Prop. 98), which established an annual minimum funding guarantee for public K-12 schools and community colleges. 

When students and their families struggle to make ends meet, their educational success is put at risk. The poverty rate for children in California more than doubled from 2021 to 2022, suggesting that more support is needed to help families meet their basic needs. 

Helping Californians meet those needs while adequately funding K-14 education is challenging when the state experiences a budget shortfall that results from revenues falling far short of projections — as is the case this year. Understanding Prop. 98 and its interaction with the state budget is essential to assess policymakers’ options for addressing the challenges this year’s state budget presents.

What is Proposition 98?

Prop. 98 is a constitutional amendment adopted by California voters in 1988 that establishes an annual minimum funding level for K-14 education each fiscal year — the Prop. 98 guarantee. Prop. 98 funding comes from a combination of state General Fund revenue and local property taxes. Prop. 98 spending supports K-12 schools (including transitional kindergarten), community colleges, county offices of education, the state preschool program, and state agencies that provide direct K-14 instructional programs. While Prop. 98 establishes a required minimum funding level for programs falling under the guarantee as a whole, it does not protect individual programs from reduction or elimination.

How is the Prop. 98 minimum funding guarantee calculated?

Each year’s Prop. 98 guarantee is calculated based on a percentage of state General Fund revenues or the prior year guarantee adjusted for K-12 attendance and an inflation measure.1The inflation measure is either the percentage change in state per capita personal income for the preceding year or the annual change in per capita state General Fund revenues plus 0.5 percent. Since some of this information is not available until after the end of the state’s fiscal year, the Legislature funds Prop. 98 at the time of the annual Budget Act based on estimates of the Prop. 98 minimum funding level. 

Once the final Prop. 98 guarantee is determined, the process of reconciling the actual and estimated guarantee is known as “settle up.” If the final Prop. 98 guarantee turns out to be higher than initially estimated, the Legislature must provide additional funding to make up the difference. On the other hand, if the Prop. 98 spending requirement is below the funding level assumed in a budget act, the Legislature has the option to amend the Budget Act to reduce funding to the lower revised minimum Prop. 98 guarantee.2The Legislature also can suspend Prop. 98 for a single year by a two-thirds vote of each house.

To the extent that the Legislature provides funding above the Prop. 98 minimum guarantee, it can increase the following year’s Prop. 98 minimum funding level and state spending required to fulfill the Prop. 98 obligation in future years. In other words, deciding to provide funding above the Prop. 98 minimum guarantee for one budget year can increase the minimum funding level for the subsequent year’s budget and beyond.

What is the Prop. 98 reserve?

California voters approved a constitutional amendment in 2014 that established the Public School System Stabilization Account (the PSSSA) – the Prop. 98 reserve. Constitutional formulas require the state to make deposits into, and withdrawals from, the Prop. 98 reserve. When the state faces a budget problem, discretionary withdrawals from the Prop. 98 reserve may also be made if the governor declares a budget emergency and the Legislature passes a bill to withdraw funds, which can only be used to support K-14 education.

Why is California facing a budget shortfall? And how large is it?

California faces a budget shortfall, also known as a “budget problem,” of tens of billions of dollars. The shortfall is based on estimates of revenues and spending across three fiscal years: 2022-23, 2023-24, and 2024-25 (the fiscal year that begins on July 1, 2024). This three-year period is known as the “budget window.” The main reason for the budget problem is that state revenue collections have fallen short of projections. A large portion of the problem is related to state revenues for the 2022 tax year, which are estimated to be about $25 billion lower than what policymakers expected when they adopted the budget for the current fiscal year last summer.

The extent of the 2022 revenue shortfall only became clear in late 2023 due to the extension of tax filing deadlines for 2022 taxes to November 2023. Because of this delay, state leaders had to finalize the 2023-24 budget last June with much less complete revenue information than usual, and they enacted a budget assuming significantly more revenue for the 2022 tax year than actually materialized.

How does California’s budget problem affect the Prop. 98 guarantee?

Revenue collections falling short of projections not only creates a budget problem for the state, it also means the Prop. 98 minimum funding guarantee for K-14 education is significantly lower than the level assumed in last year’s enacted budget. Based on revenue estimates in the governor’s January 2024 budget proposal, the Prop. 98 minimum funding guarantee dropped by $14.3 billion across the three-year budget window (2022-23 to 2024-25) compared to assumptions made last June.3The amount of state funding required to fulfill the Prop. 98 guarantee across the three-year budget window dropped by $15.2 billion below the Prop. 98 funding level assumed last June. The difference between the state’s funding requirement and the $14.3 billion total decline in the Prop. 98 guarantee reflects estimates in the governor’s January 2024 budget proposal that include a $900 million increase in local property tax revenue, which offsets the $15.2 billion reduction in the state’s portion of the Prop. 98 funding obligation.

Reconciling Prop. 98 spending with revised estimates of the Prop. 98 guarantee can be challenging when the minimum funding guarantee falls — and it is especially difficult if the revised guarantee falls significantly. The current challenge of managing such a large decline in the Prop. 98 minimum funding guarantee is further complicated because the majority of the drop — $9.1 billion — is attributed to the 2022-23 fiscal year, which ended on June 30, 2023. 

The Legislature can address the challenge by amending last year’s Budget Act to reduce Prop. 98 funding to the lower revised minimum Prop. 98 guarantee. But, because the state has already allocated 2022-23 dollars to K-14 education, reducing K-14 education funding would be logistically difficult and would significantly impact K-12 schools’ and community colleges’ budgets. On the other hand, maintaining 2022-23 Prop. 98 spending above the minimum funding requirement could boost the state’s funding obligation to meet the Prop. 98 guarantee in 2023-24 and 2024-25.

How does the governor propose to address the budget problem and protect students and educators?

To help address the state budget shortfall, the governor’s January budget proposal assumes a reduction in state funding to the lower revised estimates of the Prop. 98 guarantee over the three-year budget window (2022-23 to 2024-25). To reduce Prop. 98 spending, the governor proposes a combination of spending reductions and discretionary withdrawals from the Prop. 98 reserve. 

A significant part of the governor’s plan is an $8 billion reduction in Prop. 98 spending attributable to 2022-23, which would help reduce state General Fund spending to the lower revised Prop. 98 minimum funding level. However, the governor’s proposal would not take away the $8 billion from K-12 schools and community colleges — dollars they received for 2022-23 that have largely been spent. Instead, the governor proposes a complex accounting maneuver that would shift the $8 billion in K-14 education costs — on paper — from 2022-23 to later fiscal years.

First Look: Understanding the governor's 2024-25 state budget proposal

Learn about the key pieces of the 2024-25 California budget proposal, and explore how the governor prioritized spending and determined cuts amid a sizable projected state budget shortfall.

Specifically, $8 billion in 2022-23 costs would be spread across five state budgets from 2025-26 to 2029-30 ($1.6 billion per year). Moreover, these delayed expenses would be paid for using non-Prop. 98 funds. In other words, $8 billion in General Fund dollars from the non-Prop. 98 side of the state budget — funds that could otherwise support health, safety net, housing, and other critical services — would be spent on K-14 education but would not count as Prop. 98 spending nor boost the Prop. 98 minimum funding guarantee (the implications of this are discussed below).

In addition, to help pay for existing K-14 education program costs in 2023-24 and 2024-25, the governor proposes making $5.7 billion in discretionary withdrawals from the Prop. 98 reserve. These one-time reserve funds would help support K-14 education in 2023-24 and 2024-25 at the same time that the state reduces General Fund spending required to meet the Prop. 98 minimum funding obligation.

How could the governor’s proposal affect non-Prop. 98 spending?

The governor’s proposal would use non-Prop. 98 resources to make a total of $8 billion in payments to K-14 education starting in 2025-26, but the proposal fails to propose additional revenue or other non-spending cuts to make these payments. Because no additional alternatives are part of the plan, the proposal would create pressure to reduce spending for state budget priorities outside of K-14 education starting in 2025-26.

Shifting Prop. 98 costs to the non-Prop 98 side of the budget creates significant risks to state spending that supports California’s children and families. By creating a future obligation for K-14 education without additional resources to pay for it, the governor’s plan could force reductions in spending for programs such as child care, student aid, and social safety net services that many Californians depend on for support to make ends meet.

How can state leaders address the decline in the Prop. 98 guarantee?

Policymakers have options to address the large decline in the Prop. 98 minimum funding guarantee that include the following:

Bottom line: Policymakers can address the decline in the Prop. 98 guarantee without creating pressure to reduce spending for priorities outside of K-14 education. The decline in the state’s Prop. 98 minimum funding guarantee due to state revenues falling short of expectations creates significant challenges for state leaders this year. However, policymakers have options for addressing these challenges, including raising revenues from wealthy corporations and high-income individuals who have ample resources to contribute.

Policymakers can also choose to withdraw more from the state’s Prop. 98 reserve to support K-14 education spending. Relying on Prop. 98 reserve funds alone may not be sufficient to cover all K-14 education expenses for which the state has made commitments. However, policymakers should look to raising revenue and other options to address the decline in the Prop. 98 guarantee that do not harm K-12 schools and community colleges or create pressure to reduce spending for state budget priorities outside of K-14 education.

  • 1
    The inflation measure is either the percentage change in state per capita personal income for the preceding year or the annual change in per capita state General Fund revenues plus 0.5 percent.
  • 2
    The Legislature also can suspend Prop. 98 for a single year by a two-thirds vote of each house.
  • 3
    The amount of state funding required to fulfill the Prop. 98 guarantee across the three-year budget window dropped by $15.2 billion below the Prop. 98 funding level assumed last June. The difference between the state’s funding requirement and the $14.3 billion total decline in the Prop. 98 guarantee reflects estimates in the governor’s January 2024 budget proposal that include a $900 million increase in local property tax revenue, which offsets the $15.2 billion reduction in the state’s portion of the Prop. 98 funding obligation.

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key takeaway

California’s budget shortfall presents significant challenges for the state’s economy, public services, and residents. Addressing the shortfall requires a balanced approach that includes revenue-raising measures and targeted spending cuts to ensure continued support for critical programs and vulnerable populations.

Building a just and equitable California for every person no matter their race, ethnicity, gender, age, or zip code requires investments to create health, housing, economic, and educational opportunities. The foundation for these investments is the state budget, through which policymakers can commit the funding needed to build a California where everyone can be healthy and thrive. But sustaining and expanding the state’s investments in individuals and communities becomes more challenging when revenues fall short of projections and lead to a state budget shortfall — as is the case this year.

This Q&A:

  • looks at the size of the state budget shortfall and why it emerged,
  • notes that state revenues could come in higher or lower than expected,
  • outlines state leaders’ options for addressing the budget gap, including raising revenues and using reserves, and
  • describes how advocates can work, even in a tough budget year, to advance their priorities and lay the groundwork for building a more equitable California.

What is the size of the budget shortfall?

California faces a budget shortfall — also known as a “budget problem,” “deficit,” or “gap” — of tens of billions of dollars. The shortfall is based on estimates of revenues and spending across three fiscal years: 2022-23 (the prior year), 2023-24 (the current year), and 2024-25 (the fiscal year that begins on July 1, 2024). This three-year period is known as the “budget window.”

Policymakers must close the deficit by June 2024 as part of the 2024-25 budget process by taking actions that apply to all three fiscal years. (Potential budget actions are described in later sections of this Q&A.)

There is no single, agreed-upon estimate of the current size of the budget shortfall. Estimates involve making assumptions about economic conditions, revenue collections, and the needs of California communities in the future. The governor’s administration and the Legislative Analyst’s Office (LAO) independently produce estimates of revenue collections and the state’s overall fiscal condition for the three-year budget window, and their assumptions are often different.

For the current budget window (July 2022 through June 2025):

  • Governor Newsom’s proposed budget, released on January 10, estimates a shortfall of $38 billion.
  • However, the actions the governor proposes to take to close the deficit add up to $58 billion, according to the LAO. This means the governor has actually identified a $58 billion budget problem, based on the LAO’s analysis, even though his “headline” number — $38 billion — is much smaller. The reason why there are two different numbers is that the governor and the LAO disagree about how to categorize some spending actions in the governor’s proposed budget.
  • The LAO’s own estimate of the budget shortfall is $68 billion.

In short, the governor solves for a smaller budget shortfall ($58 billion) than the LAO projects ($68 billion). This difference is largely due to the governor’s more optimistic state revenue forecast. The governor currently assumes that revenues will be about $15 billion higher over the three-year budget window compared to the LAO’s projections.

Estimates of the budget shortfall will be updated in May as more information becomes available. The key takeaway is that the state has a sizable budget problem to address in this year’s budget process.

Why is California facing a budget problem this year?

The main reason for the budget problem is that state revenue collections have been coming in much lower than previously projected, and forecasts for future revenues have also been adjusted downward as a result. This occurs after several years of strong revenue growth that produced budget surpluses and made possible new spending commitments.

A large portion of the problem is related to state revenues for the 2022 tax year, which are estimated to be about $25 billion lower than policymakers expected when they adopted the budget for the current fiscal year last summer.

One major factor leading to the lackluster revenue performance in 2022 was the impact of the Federal Reserve’s interest rate hikes, which decreased investment, slowed economic activity, and contributed to a steep stock market decline. The stock market drop negatively impacted personal income tax collections from high-income earners, whose income is disproportionately made up of capital gains and stock-based compensation.

The extent of the 2022 revenue shortfall only became clear in late 2023 due to the extension of tax filing deadlines for 2022 taxes to November 2023. Because of this delay, state leaders had to finalize the 2023-24 budget last June with much less complete revenue information than usual, and they enacted a budget assuming significantly more revenue for the 2022 tax year than actually materialized.

Could state revenues come in higher — or lower — than current projections?

The estimated budget shortfall is just that — an estimate. In May, the governor’s Department of Finance and the Legislative Analyst’s Office will release updated projections of the size of the budget gap. These new numbers will take into account the most recent information available on the economy, revenues, and spending needs.

The governor’s updated estimates will be unveiled in his revised budget (the “May Revision”), which must be released by May 14. The May Revision will set the stage for negotiations between the governor and legislative leaders in June over the key outlines of the 2024-25 budget package. 

At that point, the state will have mostly complete information on 2023 tax receipts since the April tax deadline will have passed. Policymakers also will have some information on 2024 tax collections from quarterly estimated tax payments by businesses and high-income individuals. However, the revenues assumed in the 2024-25 budget, when enacted this summer, will involve some projections. In other words, it is still possible that actual revenues for the 2022-23 through 2024-25 period (the “budget window”) will be higher or lower than expected. 

If revenues come in higher than anticipated, state leaders could revisit some of the spending reductions, spending delays, and/or other “budget solutions” that they decide to adopt in June. Alternatively, if revenues were to come in significantly lower, state leaders would need to take additional actions, potentially including more spending solutions, although such actions would likely not occur until early to mid-2025 as part of the 2025-26 budget cycle.

What revenue-raising options do state leaders have to balance the budget?

Policymakers have many options to increase state revenues and make the state’s tax system more fair. These options should be seriously considered, not just to address the current budget problem, but also to strengthen state services on an ongoing basis and create a more equitable state.

State leaders consistently fail to examine the tens of billions of dollars that the state loses to tax breaks each year as part of the annual budget process. Many of the largest tax breaks primarily benefit wealthy corporations and high-income individuals. Eliminating or scaling back ineffective or inequitable tax breaks would provide additional revenue to support Californians struggling with the basic costs of living while also increasing tax fairness. 

For example, the state is estimated to lose around $4 billion a year to a tax break called the “water’s edge election.” This break incentivizes corporations to avoid taxes by using foreign tax havens. Policymakers should ensure that corporations are sufficiently contributing to state revenues by reexamining this and other corporate tax breaks.

Policymakers can also restructure corporate tax rates so that the small number of immensely profitable corporations — which receive the majority of profits in the state — are subject to a higher tax rate than less profitable corporations. 

Wealthy corporations can afford to pay their fair share in state taxes. Corporate profits are near record highs, yet corporations contribute a smaller share of their profits toward state taxes than they did a generation ago due to tax cuts and tax breaks approved by state policymakers. Increasing corporate taxes would only affect businesses that report profits, so it would not impact businesses’ ability to pay their workers and cover their other expenses.

The governor did put forth modest revenue solutions in his proposed 2024-25 state budget, but they make up less than 1% of the overall package of solutions — a package that also includes substantial spending cuts that would negatively impact Californians facing the most disadvantages. Policymakers could avoid painful cuts by growing state revenues instead of focusing mainly on spending solutions as the governor has proposed.

What other options do policymakers have to balance the state budget?

Aside from increasing revenues, policymakers have several additional tools to close the budget shortfall in a way that minimizes the impact on public services — particularly services that reduce poverty and prioritize economic opportunities, well-being, and the overall improvement of Californians’ lives.

One option is to use the state’s General Fund reserves. In fact, the state has built up substantial reserves precisely to help support critical services when revenues fall short.

State leaders especially should use reserve funds to bolster programs that help Californians meet basic needs like food, health care, housing, and child care. However, reserves should be used prudently. Reserve funds may be needed over multiple fiscal years, particularly if state revenues are expected to decline over an extended period. (See below for more on the state’s General Fund reserves and how they may be used.) 

Policymakers also could borrow from state special funds. Many of the state’s 500+ special funds may have large balances that aren’t immediately needed. The state could borrow these excess revenues and use them to temporarily support services that are typically supported with General Fund dollars. The borrowed funds are later repaid with interest when General Fund revenues rebound. However, policymakers should avoid borrowing from a special fund if doing so would compromise the state’s ability to achieve the policy goal for which the fund was created.

understanding California’s State Budget reserves

Want to learn more about each of California’s budget reserve accounts? View our report California’s State Budget Reserves Explained.

Another option is to shift General Fund costs onto another fund source, such as a special fund. In this case, the dollars are not borrowed. Instead, the General Fund cost displaces spending that the special fund would otherwise have paid for. This would include, for example, shifting climate-related costs from the General Fund to the Greenhouse Gas Reduction Fund or paying for the state’s typical costs for Medi-Cal with revenues from the managed care organization (MCO) tax. The governor has proposed both of these actions as part of his 2024-25 spending plan.

Borrowing from and/or shifting costs onto special funds is a reasonable and prudent budgeting practice. This approach can help to close a state budget gap in a way that minimizes the need for cuts to critical public services without compromising the state’s fiscal health.

Policymakers also can revert, delay, and/or reduce appropriations to help close a budget gap.

  • A reversion means returning unspent funds to the General Fund when state costs come in “below budgeted amounts.” Funds are typically reverted after three years, but reversions can be accelerated.
  • A delay means moving an expenditure to a later period when revenues may be more robust.
  • A reduction means providing less funding than “what has been established under current law or policy.” This could involve either partially or entirely eliminating the expenditure.

Spending reductions should be used with caution and especially should avoid targeting services that support Californians’ health and well-being — things like cash aid, food assistance, child care, and health care. Services like these are lifelines for individuals and families, and cutting them would disproportionately impact low-income communities and Californians of color.

Instead, if spending reductions are needed to help balance the budget, they should target ineffective spending, such as poorly targeted tax breaks as well as the billions of dollars that annually fund the state’s costly and inequitable prison system.

How much does the state have in budget reserves, and when can those funds be used?

California policymakers’ prudent decisions to set aside funds for a rainy day mean the state has significant resources to address a budget shortfall.

At the end of January 2024, California held a total of more than $25 billion in four state budget reserves:

  • the Budget Stabilization Account (BSA),
  • the Public School System Stabilization Account (PSSSA),
  • the Safety Net Reserve, and
  • the Special Fund for Economic Uncertainties (SFEU).

California’s Constitution and state law govern when funds may be withdrawn from these reserves, the amount that can be withdrawn, and how funds may be used. For example, the state Constitution only allows withdrawals from the BSA and PSSSA if the governor declares a budget emergency and the Legislature passes a bill, by majority vote, that approves the withdrawal. In contrast, state law allows the Legislature to withdraw funds from the Safety Net Reserve or the SFEU at any time by majority vote.

All of the funds in the PSSSA, Safety Net Reserve, and SFEU may be withdrawn in one year. However, a withdrawal from the BSA is limited to the lower of the amount needed to address the budget emergency or 50% of the BSA balance — unless funds had been withdrawn in the previous fiscal year, in which case all of the funds remaining in the BSA may be accessed. 

First Look: Understanding the governor’s 2024-25 state budget proposal

Learn about the key pieces of the 2024-25 California budget proposal, and explore how the governor prioritized spending and determined cuts amid a sizable projected state budget shortfall.

The PSSSA is the only reserve with strict limits on the use of its funds, which must be provided to support K-12 schools and community colleges. On the other hand, the Legislature may use funds from the BSA and the SFEU for any purpose.

State law specifies that funds in the Safety Net Reserve are intended to support CalWORKs and Medi-Cal benefits and services during an economic downturn. However, the Legislature may allocate these funds for other purposes if the governor signs a bill to do so.

Governor Newsom’s 2024-25 budget proposes withdrawing the entire Safety Net Reserve while also making cuts to the CalWORKs program. These proposals likely run counter to the intent of the Legislature when it created a reserve fund to support families with the greatest need. Moreover, draining the Safety Net Reserve would leave no funds to support CalWORKs and Medi-Cal benefits and services if economic conditions worsen.

What should advocates keep in mind when advancing their policy priorities this year?

Advocating for policies and the funding to support them is clearly more challenging when the state faces a budget shortfall, like it does this year. In particular, proposals that call for new spending will face much greater scrutiny — and significantly higher hurdles — compared to years when state revenues are stronger. But advocates still have options for navigating a tough budget year.

Advocates can push for new revenues and a fairer tax system. Revenues are a key tool in the budget-balancing toolbox and can prevent harmful spending cuts when there’s a budget shortfall. For example, advocates can encourage state leaders to examine the tens of billions of dollars that the state loses to tax breaks each year as part of the annual budget process.

Ensuring that our state has adequate revenues to support robust public services should be a top long-term priority regardless of the state’s fiscal condition. New revenues are needed to continue making progress toward an equitable state where everyone can be healthy and thrive, and advocates can make that case even in a tough budget year.

Advocates can also urge policymakers to protect recent policy gains and funding commitments, particularly investments that help to create a more equitable state. These include investments in child care, housing, health care, assistance for older adults and people with disabilities, and other critical services. Many recent investments could be at risk if the governor’s May Revision identifies a much larger budget gap than currently anticipated, so advocates will need to make a strong case for protecting recent gains and urge policymakers to exhaust alternatives to cuts to vital services.

Furthermore, advocates can plan for the future by continuing to make the case for additional state investments that prioritize the overall improvement of Californians’ lives. Advocates can educate state leaders about Californians’ ongoing needs, highlight policy solutions, and seek allies to help advance their proposals — using both the policy bill process and the budget process. Educating policymakers today can lay the groundwork for policy wins and expanded funding when the revenue situation improves.

In some cases, state leaders may be open to adopting a policy change, while delaying implementation until funding is provided in a subsequent state budget. This approach keeps the issue on the state’s “front burner” and puts advocates in a good position to argue for the needed resources in a future state budget cycle. However, given the significant budget challenges the state is facing, policymakers may be reluctant to commit now to a future expansion of services, even if it’s only “on paper.”

Finally, advocates should keep in mind that the budget is never truly final when the governor signs the budget package into law each June. State leaders always return to the budget later in the summer, making minor and sometimes substantial changes. For example, the Legislature may pass amendments that change the spending levels in the Budget Act. Lawmakers also may pass additional trailer bills, thus increasing the size and scope of the original budget package.

Unexpected opportunities can always emerge — so advocates should be prepared to advance their priorities through the budget process year-round.

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key takeaway

California voters will decide on March 5th, 2024, whether to pass Proposition 1, a two-part initiative aiming to improve access to behavioral health services. This includes funding for treatment facilities, housing support, and changes to the Mental Health Services Act.

Millions of Californians who cope with behavioral health conditions — mental illness or substance use disorders — rely on services and supports that are primarily provided by California’s 58 counties. Improving California’s behavioral health system is critical to ensure access to these services for all Californians, regardless of race, age, gender identity, sexual orientation, or county of residence.

In recent years, state policymakers have launched various initiatives to transform California’s behavioral health system with the goal of improving access for Californians. The most recent of these initiatives is Prop. 1. Last year, state policymakers passed, with strong support from Governor Gavin Newsom, Senate Bill 326 and Assembly Bill 531. Together, these bills placed Prop. 1 on the March 2024 ballot.

On March 5, 2024, California voters will vote on Prop. 1, a two-part measure that would 1) amend California’s Mental Health Services Act and 2) create a $6.38 billion general obligation bond. The bond would fund:

  • Behavioral health treatment and residential facilities,
  • Supportive housing for veterans and individuals at risk of or experiencing homelessness with behavioral health challenges.

This initiative presents beneficial aspects as well as potentially adverse consequences for Californians. This Q&A provides a high-level overview of Prop. 1, including how Californians with behavioral health conditions might be impacted by its passage as well as implications for the state budget.

Key Terms

Why Does Prop. 1 Matter for Californians?

Prop. 1 would impact how many Californians access mental health services and substance use disorder treatment in their communities. It would restructure a key funding source for county behavioral health services in ways that would increase housing supports but might adversely impact counties’ ability to provide behavioral health services.

The Mental Health Services Act (MHSA), which Prop. 1 would amend, accounts for about one-third of funding for county behavioral health services. The MHSA is essential in supporting services for Californians across different ages, addressing a spectrum of mild to severe behavioral health conditions.

Prop. 1 would also authorize a statewide bond to create mental health and substance use treatment beds, and housing with supportive services for unhoused Californians with behavioral health challenges. Increased supportive housing and access to treatment facilities is crucial for Californians. Capital funds accessed through the bond portion of Prop. 1 will slightly impact the state’s ability to make budgetary decisions year-to-year. However, the capacity of the state to issue future voter-approved bonds will decrease because California has a limited ability to finance bond measures.

Changes to the MHSA will impact a system that currently supports all Californians with behavioral health conditions. In contrast, the bond focuses on individuals with behavioral conditions who are at risk of or experiencing homelessness, which is a smaller portion of the unhoused population.

As thousands of Californians across the state experience the devastating effects of homelessness and barriers to behavioral health care, policymakers are asking Californians to consider if redirecting MHSA funds and authorizing a new general obligation bond is the right approach to addressing the state’s behavioral health and homelessness crises.

What Problem Is Prop. 1 Trying to Address?

Prop. 1 aims to support Californians who are most affected by severe behavioral health conditions (mental illness and substance use disorders) and homelessness. This initiative is designed to create designated funding for mental health services and housing or treatment units for people with behavioral health conditions who are or at risk of experiencing homelessness.

In early 2023, over 181,000 Californians were counted as experiencing homelessness — the traumatic effects of which can seriously harm individuals’ well-being. Research suggests the trauma of experiencing homelessness can cause people to develop mental health problems and worsen existing behavioral health challenges and coping behaviors like substance use.

There are data challenges in quantifying exactly how many unhoused Californians have a mental health condition or substance use disorder. The 2023 homelessness point-in-time count showed 25% of the 181,399 people experiencing homelessness in California had a severe mental illness and 24% had a substance use disorder. However, while there is likely overlap between these individuals, the full extent is not reported.

Access to mental health care and substance use disorder treatment can be challenging for Californians who are unhoused. A recent statewide study found that nearly 4 in 5 unhoused Californians surveyed reported experiencing a serious mental health condition at some point in life, and those with current mental health conditions reported limited access to treatment. Additionally, 1 in 5 unhoused Californians who reported regular substance use and wanted treatment were not able to receive it.

These challenges are compounded by California’s shortage of adult psychiatric and community residential beds, which prevents Californians with serious behavioral health conditions from accessing critical behavioral health services.

What Is the Mental Health Services Act?

In 2004, California voters approved the Mental Health Services Act (Prop. 63), which created a 1% surtax on personal incomes above $1 million to provide increased funding for mental health services. Its passage signified a commitment to improving mental health outcomes for Californians, with a focus on prevention, early intervention, and community-based care. This tax supports about one-third of the state’s public mental health system.

The Mental Health Services Act has five main goals:

How Are Mental Health Services Act Funds Used Today?

The majority of MHSA funding (95%) goes directly to counties, which have some flexibility in how to use these funds.

Under current law, a small percentage of MHSA dollars (5%) is reserved for state-level administration.

How Would Prop. 1 Change Mental Health Services Act Spending?

Prop. 1 proposes significant revisions to the Mental Health Services Act (MHSA). These include:

  • Changing its name to the Behavioral Health Services Act (BHSA),
  • Expanding its scope to encompass treatment for substance use disorders.

Additionally, it would modify how MHSA funds are allocated, and introduce changes related to oversight, accountability, and the community planning process. This overview will focus on outlining the new funding structure under Prop. 1.

Under Prop. 1, counties would continue to receive the bulk of BHSA funds (90%). However, the allocation across different spending categories would change, without an increase in revenues. Counties would allocate their BHSA funds as follows:

Prop. 1 could provide some exemptions for counties with a population of less than 200,000. In addition, during the first two years of implementation, counties might have the flexibility to transfer up to 14% of their funding between these categories, with a limit of 7% per category. However, this flexibility is still pending state approval and has not been confirmed.

Another notable change is that Prop. 1 would shift a small percentage of dollars from counties to the state (from about 5% of total MHSA funding to about 10%). This would result in about $140 million annually redirected to the state budget. However, this amount could be higher or lower depending on the total amount of revenue collected from the tax.

Prop. 1 would also revise the allocation of state-level funds:

  • At least 3% to the Department of Health Care Access and Information to implement a statewide behavioral health workforce initiative.
  • At least 4% to the California Department of Public Health for population-based mental health and substance use disorder prevention programs. A minimum of 51% of these funds must be used for programs serving Californians who are 25 years or younger.

It’s worth noting that Prop. 1 would not change the tax on people with incomes over $1 million per year. This means counties would be expected to expand their scope of services without an increase in revenue. In fact, county leaders have repeatedly raised concerns about the disruption that Prop. 1 could cause. Specifically, the MHSA restructuring could result in significantly less funding for core services, which could lead to counties:

  • Canceling contracts with community-based organizations. 
  • Closing programs that are currently serving Californians.
  • Reducing county staffing.

If passed, the exact impact of Prop. 1 will vary by county and depend on how much revenue is collected in any given year. It’s important to keep in mind that the MHSA funds services for Californians of all ages for a range of conditions — mild to moderate to severe. The restructuring of MHSA funding would target a subset of this population. Therefore, programs and services for prevention and early intervention in some counties, for instance, could experience disruptions due to the new prioritization of funding.

What Can We Expect from the Behavioral Health Infrastructure Bond?

The Behavioral Health Infrastructure Bond would create a $6.38 billion general obligation bond for:

  • Infrastructure development of treatment and residential care facilities,
  • Supportive housing units for veterans and other Californians with serious mental health conditions and substance use disorders.

These funds are estimated to create up to 4,350 housing units, with 2,350 set aside for veterans, and 6,800 mental health and substance use treatment places for an approximate total of 11,150 new behavioral health and supportive housing units statewide. An estimated 26,700 outpatient treatment slots will also be created that may serve thousands of Californians annually.

Projects funded by the Behavioral Health Infrastructure Bond will be eligible for local streamlined review processes if they meet select criteria. The bond funds will be allocated as follows:

First Look: Understanding the governor's 2024-25 state budget proposal

Learn about the key pieces of the 2024-25 California budget proposal, and explore how the governor prioritized spending and determined cuts amid a sizable projected state budget shortfall.

What Would the Infrastructure Bond Mean for the State Budget?

Under Prop. 1, the state would issue up to $6.38 billion in general obligation (GO) bonds, with the funds going toward:

  • Grants or loans for vital treatment and residential care facilities,
  • Supportive housing units.

California voters have a record of funding large infrastructure projects through bonds as it does allow the state to access impactful funding amounts that are designed to serve public interests at large over many years.

In issuing bonds, the state must repay the bond debt service (which is the principal bond amount plus interest) through General Fund dollars. The most recent cost estimate assumes a 30-year debt service resulting in projected payments of roughly $310 million per year. Under this estimate, it would cost the state approximately $9.3 billion to repay the total bond debt, not including the cost of inflation. California currently spends roughly 2.5% of the state budget on repaying various bond obligations voters have decided on in the past.

While there are ways to equitably reform the state budget’s revenue streams, policymakers must balance the yearly limited discretionary flexible dollars in the General Fund. GO bonds in essence prioritize increased debt-service payments to be drawn from the General Fund over potential ongoing or one-time funding. Repaying the bond portion of Prop. 1 is a trade-off that will slightly reduce the flexible dollars left for other vital public services that may already serve Californians with behavioral health conditions and those at risk of or experiencing homelessness. It also challenges the state’s capacity to fund future voter-approved bonds since California has limitations on financing bond measures.

Another consideration is the ongoing operating costs that will be needed to adequately sustain the facilities produced through Prop. 1. As explained above, the MHSA restructuring does designate 30% to housing interventions which includes rental and operating subsidies. The funds can presumably help sustain facilities that are projected to be secured through the bond funding. However, it is uncertain whether these funds and those from other sources will be sufficient and accessed efficiently to ensure adequate upkeep, staffing, and proper care for the Californians receiving housing and services through these projects.

The infrastructure projects funded under the bond would build on existing state programs that received one-time funding through previous budget allocations or voter-approved bonds which are close to being depleted.

How Might Californians Be Impacted by Prop. 1?

The proposal presents various promising aspects. First of all, the expansion of services to substance use disorder treatment is positive. This broadened scope recognizes that mental health challenges and substance use disorders sometimes occur together. In fact, more than 1 in 4 adults living with a serious mental illness also have a substance use disorder. This underscores the importance of providing treatment for both conditions.

Another positive aspect of this proposal is the prioritization of treatment facilities and supportive housing infrastructure for Californians at risk of or experiencing homelessness with behavioral health conditions. Due to racism, ableism, and other forms of discrimination, some Californians are more likely to experience the devastating effects of homelessness at some point in their lifetime. This disparity is particularly stark for Black, Indigenous and Pacific Islander Californians, adults without children, older adults, and transgender and other LGBTQ+ individuals.

Notably, the new investments and prioritization of funds under Prop. 1 target a small but important share of the unhoused population. The majority of unhoused Californians face short-term homelessness (61%), for which deeply affordable permanent housing is needed. For those who are chronically homeless (39%) and may have behavioral health challenges, the increased supportive housing units are crucial if they are appropriately sustained with wraparound supportive services.

One concern about Prop. 1 is the restructuring of funding under the Mental Health Services Act (MHSA). While the exact consequences of this change are not entirely clear for each county, it could have adverse effects. The MHSA has been instrumental in providing innovative, community-based services for historically underserved communities, including people of color and LGBTQ+ communities. Given that county leaders have expressed that this initiative could result in less funding for core services, Prop. 1 could negatively impact services for Californians of color and LGBTQ+ communities that are currently supported by MHSA funding.

A key flaw of this initiative is that it expands the scope of the MHSA and prioritizes funding for people who are or at risk of experiencing homelessness without increasing the tax or providing new revenue to support existing county behavioral health programs. This approach is concerning, as it redirects funds originally allocated for a specific purpose to address a different need.

What Are Supporters and Opponents Saying?

supporters

Supporters claim that Prop. 1 would prioritize existing funds and generate new funds for Californians with the most severe behavioral health needs and those living in encampments. Other supporters assert that the proposition is a beneficial component in advancing the variety of interventions needed to address California’s housing and homelessness challenges. Supporters of Prop. 1 include California Big City Mayors as well as some behavioral health and housing advocates.

opponents

Opponents, including disability rights advocates and peer support advocates, argue that Prop. 1 represents a significant regression in the treatment of mental illness and substance use disorders, likening its impact to a 50-year setback. This perspective stems from allowing funding to be used for involuntary or forced treatment facilities. Opponents also claim that Prop. 1 could result in reduced mental health services for Black, Indigenous, and other people of color and LGBTQ+ Californians.

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key takeaway

Federal government shutdowns can significantly disrupt California’s essential safety net programs, potentially affecting millions of residents and underscoring the importance of ongoing support for these vital services.

Access to health care, affordable food, safe housing, and a safety net to turn to during unexpected challenges is essential for everyone. Safety net programs provide critical support to more than 1 in 3 Californians every year. Without these important public supports, California’s poverty rate would be much higher.

During a federal government shutdown, safety net programs that receive federal funding can be affected, potentially causing disruptions to the lives of millions of Californians. This Q&A provides an overview of California’s safety net programs and how they can be impacted during a federal government shutdown.

What Are Safety Net Programs and How Many Californians Do They Support?


Safety net programs provide financial assistance, health care, and other essential services to millions of Californians. These programs help people with low-incomes or people experiencing unexpected challenges — such as losing a job — receive the care and support they need to get by. California safety net programs are supported by state and federal funding.

Why Does a Federal Government Shutdown Happen?

A federal government shutdown occurs when the United States Congress fails to pass annual or temporary spending bills before the start of the new federal fiscal year, which begins on October 1st. Federal policymakers can enact temporary spending bills, or continuing resolutions, that allow the government to continue operating while policymakers reach an agreement on the federal budget. Shutdowns typically happen due to political disputes, disagreements over spending priorities, and legislative gridlock.

How Can a Federal Government Shutdown Impact Safety Net Programs?

The duration of a federal government shutdown would determine the impact on safety net programs. Prolonged shutdowns can have devastating consequences for Californians who receive health, food, and housing assistance. If a shutdown persists, California policymakers should allocate additional state funds to sustain critical programs and services.

In contrast, shorter federal government shutdowns, lasting only a few days, generally cause less disruptions. Californians can still access various health and safety net supports during these brief closures. For instance, Californians who rely on Medi-Cal can maintain access to health care services, as Medi-Cal providers could continue to receive reimbursement in the short term. This is partly due to advance funding provisions within the Medicaid program, which can be secured in prior federal budgets.

What Are the Potential Impacts of a Brief Government Shutdown?

Community health centers, including Federally Qualified Health Centers, are more susceptible to adverse impacts. Even a brief shutdown would affect community health centers’ ability to provide services and meet operating expenses because they rely on funding from federal grants.

Short shutdowns can also have repercussions for other safety net programs. Some government employees would be furloughed during shutdowns, which means programs could experience staffing shortages. Staffing shortages could negatively impact Californians. For example, even though Californians could continue to receive rental assistance through HUD (Housing and Urban Development), nearly all of HUD’s fair housing activities would cease due to a reduced staffing.

What’s At Stake?

A prolonged federal shutdown could have disastrous effects on our state and disrupt the lives of millions of Californians, especially communities of color. Past and current racist wage and employment policies concentrate people of color into under-valued occupations with lower wages and minimal benefits. As a result, Black, Latinx, and other Californians of color are more likely to have trouble affording basic needs — like housing, groceries, and diapers — and are also more likely to qualify for safety net programs. If a prolonged shutdown leads to a suspension or reduction of critical programs and services, it would disrupt the lives of millions of Californians and exacerbate economic inequality. This underscores the need to ensure that every Californian, regardless of their race, age, zip code, or gender, can thrive and share in the state's prosperity.

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