What you need to know about the $351.7 billion federal budget Newsom just signed

SACRAMENTO – Gov. Gavin Newsom on Monday signed his last state budget as governor, a $351.7 billion spending plan that seeks to lift the poorest Californians through a tax system that depends on the stock market gains of the rich.

In a video message, Newsom touted free school meals, daycare, 130,000 subsidized child care spaces and other accomplishments during his time at the Capitol, a time in the nation's history marked by a dramatic expansion of state government and more than $100 billion in revenue.

“Over the past eight years, we've built great things for the people of California — some of the boldest things any government in this state has done in a generation,” Newsom said. “And we did this without breaking the bank. We did this by design.”

The agreement ends weeks of lobbying and negotiations between lawmakers and the governor at the state Capitol over how to handle an increase in income taxes collected on stock market gains related to artificial intelligence.

Economists have warned that the revenue decline may be temporary and analysts say rising state spending could leave California in a challenging position if the economy slows.

Assemblyman David Tangipa (R-Fresno) agreed with Democrats that the budget is “compassionate.”

“My fear is that it's not a very strong budget, and the budget continues a pattern that Californians know very well: Spend now, forgive later, and hope someone pays the bill,” he said during a floor debate Monday.

Here's what you need to know about the spending plan, which will go into effect on July 1.

Who decides the government budget?

The simple answer is: Democrats. California voters elected Democrats to represent 30 of the 40 seats in the Senate and 60 of the 80 seats in the House. The budget was passed by majority vote in each house of the Legislature and signed by Gov. Gavin Newsom, also a Democrat.

The most complicated answer is that the budget is the product of a number of legislative hearings, millions of dollars spent on lobbying foreign interests, negotiations between lawmakers and the governor and ultimately subject to the same political dynamics that dominate the Democratic Alliance party.

Senate President Pro Tem Monique Limón (D-Goleta) and Assembly Speaker Robert Rivas (D-Hollister), in consultation with the chairmen of the budget committees, represented their Democratic allies and reached a final agreement on the details of the spending plan with Newsom. In fact, the staff of the three parties handled most, if not all, of the negotiations to get there.

Union leaders seeking better wages, working conditions, employee benefits and opportunities to expand their positions are often brought in to negotiate or negotiate hard agreements as business groups try to fight additional regulations, taxes and fees, and supportive policies that increase their financial performance.

Democrats are spending more than ever. How is that possible?

The Legislative Analyst's Office, an independent financial adviser to lawmakers, recently reviewed state spending increases from 2019-2020, Newsom's first full year in office.

Between the budget approved that year and the spending proposal Newsom introduced in January, spending from the state's general fund increased by more than $100 billion, or 70%. That's more than a 60% increase in revenue over that period. California often runs a deficit because Democrats spend more than the state brings in.

The LAO found that the increase was due to increased costs to maintain programs and services that were already in place when Newsom took office. About 30 percent of the remaining spending growth is classified as new, either through newly created programs or expansion of existing services.

Among the report's conclusions: California couldn't afford the programs Newsom's predecessor and the ones he and the Legislature adopted.

To balance the budget over the past few years, Newsom and lawmakers have dipped into state funds at a time when California is experiencing strong revenue growth, the LAO warned. Democrats have also raised taxes on businesses, paid for programs in other currencies and set up fixed deposits among other solutions.

This year, the federal budget puts $6.4 billion in higher-than-expected revenues into a temporary holding account to reduce the deficit and balance the budget in 2027-28.

Democrats are pushing for a change in the state constitution on the November ballot that would allow them to set aside more money in years of good income growth to prevent further recessions.

Where does the money go?

Education and Medi-Cal are two of the state's largest expenditures.

Medi-Cal is the state's version of subsidized health insurance for low-income Californians and provides medical, dental and vision care to an estimated 14.5 million people, or about one-third of the state's population.

The federal government pays more than half the cost of the program. California is expected to spend about $50 billion from the general fund next year out of an estimated total of more than $220 billion in shared costs between the state and federal governments, according to the LAO. State taxes and fees paid to providers also help fund Medi-Cal.

Overall, Medi-Cal costs more than any other federal program and accounts for about 40% of total spending, including federal funds, according to the LAO.

Spending on Medi-Cal has more than doubled in the past 10 years, which the LAO attributes to increased enrollment costs, more enrollees and a larger share of older adults seeking care, among other factors.

Under Newsom, California expanded Medi-Cal, including providing coverage to all immigrants regardless of their immigration status, which the governor said lowered the state's uninsured rate to 5.9%.

Medi-Cal costs have grown more than Democrats expected and have led Newsom to propose cuts.

The final budget deal rejected Newsom's call to lower the asset limit to $2,000 now and instead lower it to $21,000 by 2027-28 to qualify for Medi-Cal. The Legislature also delayed the governor's proposal to reduce dental coverage for asylum seekers and other immigrants in the limited Medi-Cal area, according to Jason Sisney, the Council's lead budget adviser who writes on the budget for Substack.

The budget includes Newsom's proposal to shift registrants with unsatisfactory immigration status, a term that includes undocumented immigrants and others, from managed care to fee-for-service to save costs.

Under Proposition 98, approved by voters in 1988, California has a minimum funding guarantee for public schools and colleges and allocates about 40% of its revenue to the education fund.

Sisney said the budget increases the Local Control Funding Formula by $2.2 billion and provides a historic per-pupil budget of $21,148. Support for special education also increased by $1.8 billion.

The California Community Schools Partnership Program received a $1 billion boost and Democrats directed $2.8 million in additional funding to the program that provides free school meals.

The budget also creates 22,770 new places for free or reduced child care, which Newsom had proposed to cut.