California Lawmakers Finalize $352 Billion Budget in Newsom’s Last Full Fiscal Year as Governor

After months of closed-door negotiations, Governor Gavin Newsom and Democratic legislative leaders locked in a $352 billion budget for the 2026-27 fiscal year — a deal that leans on higher-than-expected tax revenue and new levies to push the state’s toughest spending decisions down the road, at least for now.

The final agreement looks notably different from where the process started in January. Newsom’s original proposal leaned into fiscal caution, citing unpredictable and tumultuous federal policy on tariffs and immigration as reasons to hold the line on new spending. By May, his revised budget had eliminated the state’s projected deficit through 2028 by cutting $1.8 billion in general fund spending and depositing nearly $10 billion into a surplus holding account. But that restraint ran into resistance from county governments and Democratic lawmakers, who warned that some of the proposed healthcare and social-service cuts would land hardest on the state’s most vulnerable residents.

The compromise that emerged pushes the most painful decisions into 2027. Newsom agreed to scrap planned cuts to In-Home Supportive Services, the program that provides in-home care to roughly 900,000 low-income Californians. Lawmakers also negotiated a softer version of a proposed Medi-Cal asset test: starting in July 2027, seniors and people with disabilities will need to hold assets below $21,000 (or $31,000 for couples) to qualify — a real tightening from today’s $130,000 individual ceiling, but far less abrupt than what Newsom initially floated.

To pay for it, the budget assumes revenue from a large-corporation tax credit limitation and a new tax on digital software and Software-as-a-Service sales, alongside an extended tax on health plans to help backstop Medi-Cal funding. It also builds up the state’s Rainy Day Fund by more than $13 billion above last year’s level and advances a constitutional amendment that would let voters expand how much California can save in strong years — a hedge against the kind of boom-bust budgeting that has defined the state’s finances for decades.

Housing gets real money in this deal too, though it’s a smaller down payment than what will appear on the November ballot separately. The budget includes $200 million for the Multifamily Housing Program and $100 million for housing stability programs, while explicitly anticipating a much larger housing bond heading to voters later this year.

For a budget being written in Newsom’s final full year in office, the tone is notably unglamorous — more bookkeeping than legacy-building. Legislative leaders framed it as a defensive maneuver, describing it as a responsible, compassionate budget built specifically to counter what they called the Trump administration’s attacks on Californians’ health coverage and safety-net programs. That defensive posture shows up throughout the numbers: the added $300 million in state costs to backfill federal CalFresh funding changes is a direct response to federal policy shifts affecting the roughly 3 million California households that rely on the food-assistance program.

What’s notably absent from this budget is any dramatic new initiative. Compared to some of Newsom’s earlier tenure — marked by ambitious climate spending and expansive new programs — this deal reads as consolidation. The administration’s own language leaned into that framing, arguing that fiscal discipline and progressive values go hand in hand, a message clearly aimed at Republican critics who’ve spent the past year arguing California’s finances are unsustainable.

Still, the delay-not-deny structure of this budget means the real reckoning hasn’t disappeared, it’s been rescheduled. The Medi-Cal asset test doesn’t bite until July 2027. The long-term operating deficit — which the administration says it’s cut by more than half for 2028-29 — is improved, not eliminated. Whoever succeeds Newsom in Sacramento inherits both the smoothed-over budget and the bill that’s still coming due.

For Californians watching their own wallets, the practical effects are more indirect than immediate. In-Home Supportive Services recipients keep their coverage as-is for now. Medi-Cal beneficiaries with modest savings have roughly a year’s warning before asset limits tighten. Businesses selling digital software and SaaS products into California should expect to start seeing that new tax show up in their compliance obligations. And anyone watching the November ballot will see housing bond spending discussed alongside this budget, even though the two are technically separate line items moving through Sacramento in parallel.

The bigger story here may be less about any single line item and more about what this budget signals: a state government bracing for federal headwinds it can’t control, buying itself another year before harder choices become unavoidable.